Term Insurance vs Investment Link in 2020

Back in 2008, I wrote about Buy Term Invest the Rest.  Is it still a good strategy now; 10+ years later?  Well, let's take a look; :-

Full Info of Public Mutual Funds

Public Mutual has 88 funds which is not easy to analyse all of them just by browsing around. Investing base one word of mouth (the company, the agent, friends etc.) is really not a good practice. So its best to put all the basic info into a spreadsheet and analyse from there.

list of Public Mutual Funds

Public Mutual is the largest mutual fund company in Malaysia, they have 88 funds !! HOW to choose wisely from 88 choices !? Its CRAZY !! If one can analyse all those 88 funds, one must be good at investing in stocks directly too!

Anyway below show the list sorted by Shariah compliant, followed by category of funds and lastly by fund name. This is the best way I can take a peek by the purpose of investment. Hope this is useful to you too ...

There is NO such thing as Passive Income !?

21st century personal finance is moving away from saving and focus into the income arena. In short, the gurus are now educating public that saving is NOT good enough, hence sourcing for passive incomes on the another hand is a BETTER solution, than just saving alone.

While the concept is definitely true and correct but unfortunately as the hypes go bigger and bigger, the idea of passive income has been abused and more scams started to appear in the market,

21st century Economy Politic Quadrant

The Economy-Political Quadrant may seems like telling where to keep or invest your money despite good or bad time.

It indeed works very well during 20th century. Unfortunately comes to 21st century, not only has the year changed, personal finance arena has changed drastically as well.

Gold has been speculated so much that it MAY no longer be the standard of money.

There used to be only 'property' in the city. Now there are satellite towns, suburbs ... agriculture lands and even dust bins ( recycle ) have become valuable estates too. While property remains the right category to invest into whenever economy is booming, but predict the right future seems like tougher than buying lottery.

Government bonds used to be de-Facto action when a country is stable. But in today's world, a country is as smart as a taicon's finance. One day they are the LARGEST, the next day they are GONE.

Stock market used to be the back bone of a country's economy. However, the market of derivatives has become so HUGE that the REAL and PHYSICAL is NO LONGER more real than VIRTUAL

So in 21st century, the element of Stock-Property-Funds-Gold is really questionable. However, one fundamental that doesn't change is that

you will have to identify what to do at what time that is BEST for YOU !

Hope you will find your own very best Economy-Political Quadrant soon !

Economy Politic Finance Quadrant

There are 2 BIG main external factors affecting our investment decisions

• Economy
• Politic

When the time is really bad (economy downturn and politically unstable), its best to park your money under something that is really stable, ie Gold. Which is by definition usable anywhere you go in anytime.

When its good time, invest direct to the stock market would yield very good return.

When the economy is not so good in a strong country, the government bonds or related money market would be able to yield higher return than just gold.

However, the most dispute solution in good economy unstable country is investment in property. This is mainly due to easier rental and higher chance of capital gain.

By simply moving money around depends on the political and economy situation, one was able to achieve more than 12% compound return for the past 20 years. That is equivalent to a 10X return.

But by no mean this is easily done. Some of the concerns include;

• how would one know exactly when economy/politic turns good/bad ?
• is Gold the ONLY option ?
• property may not easily liquidated
• how to choose which property or stock market ?

. . . which can be explored further.

Mutual Fund of the year 2010 ? By the numbers ...

In 2009, about 10 mutual funds thats worth looked into were selected out of 530 choices in Malaysia.

Today lets take a look at how they performed in the past 6 months. Below chart shows their respective return in percentage. From past 1 day, past 1 week, past 1 month etc.

The actual percentage return is NOT important here. We are comparing fund performances across different fund managers. What we are looking for is a graph that consistently stay above the others. That would give an indication of "consistently outperform the others".

The most apparent winner is OSK Equity Fund and the worst is Public Ittikal. However, this does not imply anyone of them is better than another. The market has been trending up generally. OSK is well verse in stock market and therefore able to catch most of the up trend. Public Ittikal on the other hand only deals with halal and safe instruments. You can be assured that both of these funds are very strong in their fundamentals.

However, one clear message from this chart is that we can take TA away from this list. As you may see, their chart patterns show as if they have no clue how the market will move and don't even have any good strategies in their fund management. They are supposed to be as good as OSK.

So if you think the market is continue to be bullish, exercise DCA on OSK-UOB Equity Trust. Else if you prefer safer haven, try AMB Ethical Trust and Public Saving.

More Info : invest your EPF money in stock market direclty.

It was mentioned before that you can use your EPF money to invest directly in the stock market, especially through Jupiter and Amara. The main selling points are;

1. cheaper than invest to Mutual Fund ( 5.5% ) vs 3% charged by Amara
2. freedom to invest in any particular stock and not a whole portfolio.

Although Jupiter only charges 0.1% or minimum RM 10 brokerage fee but actually Amara, the licensed EPF withdrawal facilitator, have more charges other than the 3% one time drawn down fee.

The significant ones are

• Transaction fee : 0.1% or minimum RM 15 per contract
• Custody fee RM 0.005 per 1,000 shares per month

Add together with Jupiter's fee, your total brokerage fee may effectively be at 0.2% or minimum RM 25. So each MOTS (Minimum Optimized Trading Size) is RM 12,500. With RM 25,000 you can only make 2 transactions.

Assuming you fully load all your investment in the market and average price per share is RM 1. Then 25,000 shares /1,000 x 0.5 cent = RM 0.125 every month. 1 year would be RM 1.50. That would be 0.006% of your initial RM 25,000 investment.

At the end, you may still be paying 4-5% fee in the whole process. In contrast to mutual fund's 5.5%. If saving fee is your main target, perhaps becoming a mutual fund agent yourself could end up saving more. On the other hands, most of the EPF oriented mutual funds are charging less fee.

So if EPF gets a 5% return, you should be able to do more than 10% in order to 'invest yourself'. Else you may just be depleting your ASS - Automatic Saving System.

Also be reminded that if you make a lot of transactions, you may end up paying more than 6% fee.

Malaysia Unit Trusts 5 years Return

Below table shows the return of Unit Trusts in Malaysia from 2001 to 2006. I added two columns to the right.

Average return per year is simply return divided by number of years, in this case, n / 5 years ie. 25.9 / 5 = 5.18

Equivalent Compound Return Rate is using the FV formula to calculate what the interest rate would be if you save $100 5 years ago to get the same return. This is the number you should use to compare with Fix Deposit interest rate.

Pit falls ? Not so much on that but some key concepts when reading numbers like this ...

These numbers don't mean much by themselves. You should compare them with other numbers to make more senses and decide course of action. For example;

• Compare with Stock Market indexes. Mutual funds are suppose to outperform certain benchmarks. So a fund is only really doing well when it is BETTER than ....
• Compare with Fix Deposit interest. Are these rates significantly higher than FD through the same period ?
• Compare with Inflation rates. Similar to FD comparison but from a different angle.
• Compare with itself. How are the performances 2002-2007, 2003-2008 etc ? 2007 to 2008 are losing years. If one uses 2001-2006 as the 'BEST' years, then numbers of 2007 to 2008 should also be analysed as the 'WORST' years - as in comparing reward and risk ratio.

Lastly, match past record to today's situation. Index Tracking funds did the best during economy recovering years from 2001-2006. Is today's economy like 2001 ? If yes we should buy ! Or is today more like 2006 where economy is booming but due to doom ? If yes we should probably cash out. Or is today in between ?

Don't know what this is all about ? Apply Dollar Cost Averaging.

Remember that if you apply DCA, above mentioned returns do not apply to you neither.

What you can do with mutual fund's high fee ?

It was mentioned that Mutual Fund is one of the few personal finance tools that can provide highest return passively. (A) There are a lot of other venues that can provide higher return but they require much more active effort than mutual fund. (B) There are also a lot of other tools that is more passive than mutual fund, but their returns are not high. (C) There are also some solutions that provide both high return passively but they are NOT personal tools.

However, even the best tool in the world can be a disaster when used wrongly. Mutual fund is no exception. The right way to use mutual fund in your personal finance is;

1. choose the right fund manager

2. choose the largest or most active fund ( In Malaysia, the only choice is Public Mutual )

3. apply Dollar Cost Averaging

4. adopt Buy and Keep, not Buy and Sell. Buy and Switch, however, is a good alternative between the two.

Any activities other than above may stop you from using mutual fund to

1. provide the highest return

2. passively

3. personal tools

With that in place, the only challenge left is its high fee. Although there are many justification on the fee, the future for mutual fund industry is actually the continous effort to streamline this service charge. There are 2 ways to do that;

1. Provide more values from the same high fee or

2. Cut to lower fee by streamlining distribution channels.

The good news in Malaysia is, there are already distinctive winners in both strategies. Public Mutual will continue to provide more values to its investors, the significant threshold is MYR 100,000 where you become a Mutual Gold member to rip those benefits out of the service charges you paid.

On the other hand, Fundsupermart is the winner in low fee funds. However, Fundsupermart is NOT a fund manager. They only provide a trading platform for fund managers to distribute their low fee funds. Buying and Selling funds in fundsupermart is a totally whole new concept comparing to traditional methods. Hence do take sometime to learn and realize what you have given away when paying the lower fee. Whatever result you get in future is the action you take now, its all you now and no one else to blame.

What else can you do if you want to invest with mutual fund but want to minimize the high fee impact ?

Join the industry to promote mutual fund as an agent. All agents get paid in commissions. If you buy from yourself, part of the service charges you paid goes back to yourself. It may not be easy as this actually require a lot more effort to get qualify etc. But the knowledge and experience stay with you.

So in contrast to mutual fund's service charges, you can;

1. rip more values from your fund managers - Public Mutual Gold

2. buy lower fee funds - Fundsupermart

3. buy from yourself - ...

Other related articles

One of the earliest mutual fund articles - an introduction

do you love or hate mutual fund ?

Stock fee vs mutual fund fee

Bad Fund Manager :Force invest or blindly follow rules

Bad Fund Manager: over or under diversify

Size does matter in mutual fund selection

It was mentioned before that when choosing which mutual fund to invest in, it is more important to choose the fund manager rather than the funds. However, most of the times the fund manager is not a single person. In most established mutual fund businesses, the fund manager itself is a team of people. Although sometimes there may be a single person making all the investment decisions but as time goes, business expands, number of funds to manage increase and that person will eventually need to delegate, either to a system or other people.

So how to analyse the fund manager then? Well, in that case the fund manager is actually the company, so we analyse the company itself.

Investment is a money game. You use money to earn more money. If you have the right strategy and little money, you would probably make some money. But if you have a lot of money to start with, you probably make so much more when your investment decision is right. Earning 100% from $1 gives you $2, but earning 100% from $100 gives you $200. The earn ratio is the same, but it is a huge difference between $1 and $100 ...

When you make a mistake losing all your money, you are dome. But if you have more money, you can apply money management so that you have some reserve funds to try again, especially to cover your previous mistakes. So more money gives you more number of investment trials.

As mention before, the higher amount usually also implies lower fee in most investments. You can buy stocks with $100 but your cost can be as high as 8-10%. But if each of your transaction is above MOTS : Minimum Optimized Trading Size ie. $20,000 then your fee is lower than 1%.

So Size Does Matter and the primitif requirment for a fund manager to perform is to have a large sum of capital.

In order to keep mutual fund as a passive investment tool ie. simplest decision making, we can simply pick the largest mutual fund company to invest in. In Malaysia, its has been deadly simple in this aspect, Public Mutual is not the obvious choice but the only choice when size is concern, too bad.

According to Liper Fund, as of 22 June 2009 these are a total of 68 millions of unit trusts managed in Malaysia. The fund sizes managed by various Malaysia Unit Trust Management Companies are as followed;

28 millions Public Mutual

8 millions AmInvestment and CIMB

3 millions OSK-UOB, Prudential

2 millions HLG, Hwang-DBS

1 millions ING, Pacific, MAAKL

So the truth of using mutual fund as the highest return passive personal finance tool is as simple as buying Public Mutual every month automatcially using a Standing Instruction ie. apply the DCA - Dollar Cost Averaging technique. This recommendation has been true for the past 10-20 years and most likely to be continue correct for the next 5 years.

To further show the confidence on this recommendation, anyone who has had a Public Mutual fund with DCA applied. If you are still NOT happy after 3-5 years, contact me for a potential total buy out of all your investment units.

It will take a while for 8 millions to catch up with 28 millions. However, not impossible. If you have been watching all the mutual fund companies growth for the past 10 years like I have, the growth of OSK and Prudential are really significant.

If for whatever reason Public Mutual is NOT an option for you, the other choices following this same argument would be CIMB from the banking industry and Prudential from the insurance industry. While CIMB's size stands side to side with AmInvestment but Prudential is way ahead of other insurance oriented mutual fund companies.

How about which funds to buy ? Well, following this same argument, we should buy the largest fund size funds. And that usually means NOT the NEW funds. Most of the older funds have bigger fund sizes. Believe it or not, some of the recommendations based on performance here are actually some of the oldest funds too.

KLSE New Tick Size Impact

this is a follow up post ...

This is the current tick size in KLSE. It means if you buy a stock at RM 0.900 the next up price is 0.905 and the next down price is 0.895. Like wise, if you buy a stock at RM 1.01, the next prices are RM 1.00 and RM 1.02

If we plot a graph across a range of prices, we can observe that the tick size may imply a different percentage to each price, also known as having different weightage.

For example, if we buy at RM 1.00, the tick size is RM 0.01, so the weightage is 1%. If we buy at RM 2.00, the tick size is the same but the weightage is 0.5% <== ( 0.01 / 2 * 100 )

Y axis : tick size weightage

X asix : stock price

From above chart, we can see that the tick size effect is broadly cap at 1% except when the prices are lower than RM 0.50. So buying stocks at RM1, RM5, RM10 and RM 25 have similar effect, percentage wise.

Below is the latest tick size starting from 3 Aug 2009.

And this is the associated graph.

When you put both graph together, the current / old tick size vs the future / new ones, you get below graphs ...

There are no changes for stock prices below RM 3.00

However, all stock prices at and above RM 3.00 have significantly changes ! In short, starting on RM 3 onward, the tick size weightage is moving toward Zero as the stock price increases. With an exception at RM10+.

This brings to 2 recommendations when the new tick size is implemented;

1. Long term investors can now accumulate expensive stocks with much cheaper cost, especially those between RM 3 and RM 10.

2. The only speculatable ground is now reduced to below RM 0.50 arena only.

In short, this is great for both long term investors and speculators. Generally more expensive stocks ( above RM 3 ) are running business at larger scale. Reducing speculation on these businesses and attracting more long term investors generally allow them to grow steadily and improve health on the play ground.

However Malaysia shares buyers don't really know much about Minimum Optimized Trading Size and Tick Size Weightage anyway. Most do NOT trade strategically. Hence we will most probably NOT see any BIG change in trading habits especially for retail investors.

On the other hands, fund managers are not that ignorant on this aspect. If the mutual fund you are holding also invest mostly into RM3 to RM10 stocks, like those capital growth fund. The average fund's transactional cost could save as much as 75% simply by doing nothing after 3 Aug.

Take RM10 stock for example, one tick size changes from RM0.10 to RM 0.02, that is a 80% discount!

Although this saving is actually a strategical cost saving, not a real and direct cost saving. But nevertheless this will still leave a positive impact on a fund's portfolio. So theoritically, your mutual fund should start giving you better return after 3 Aug. Fund managers who choose not to report about this cost saving in their next annual report, are fund managers you should consider challenging on their transparency, honesty and their true interest with your money.

I can finally buy more BAT ... :)

How to passively choose a mutual fund

Soon after this site claims that mutual fund is one of the PASSIVE personal finance tools, it turns around and shows a past performance analysis where some of the best performed funds are choosen base on their prvious good returns. Looking at those numbers and charts, it doesn't seem PASSIVE at all !

What is going on ? What is the Right way to decide which fund to buy the passive way ?

The FIRST mutual fund article on this site had already mentioned the answer actually,

Choose Fund Manager,

Not the Fund !

Despite many justification of the high fee on mutual fund (general, vs stock fee), one must admit that Its FREE to save money in Fix Deposit and buying shares in stock market is cheaper. Mutual fund could be the MOST expensive personal finance vehicle.

So what are you paying for ? Why do you want to pay 5-6% UP FRONT in order to earn more money ?

Are you sure you want to pay the extra fee just because they did good in the past ?

Do you pay more just because you agree with the investment objective of the fund ?

How about just because a certain fund has some of the stocks you want to buy anyway ?

The agent is your friend, she did a great sale talk ?

Lets see what happen when you pay extra in other scenarios;

Sometimes I like to shop in a particular grocery store more than another even if some items are slightly more expensive. That is because the store owner is really friendly and knowledgable. He can answer most of my questions and I really don't mind letting him earn the extra cents.

If your ultimate goal in mutual fund is to earn more money passively without understanding the whole mechanism, then what you are really buying is your belief that the fund manager can do well with your money.

Choose Fund Manager,

Not the Fund !

The fund itself is pretty much a fix element, the objective is hard cast on stone. Past performance tells a lot but is really irrelevant to the future but future income is what you really care about. The environment could repeat itself or it may change. Either way, there is only one element that we can hope for to address all future unknown issues - the Fund Manager.

If the objective of a fund is met, its because the Fund Manager did a good job. If the good past performance continue, its because the fund manager is keeping it. If the bad past performance turns good in future, it is because the fund manager improves.

Without the trust on the Fund Manager, all other aspects carry less or almost no weight at all.

So that is it! Find out who the Fund Manager is, ask for a lunch date or read their reports to determine if this is the type of guys or companies you would trust your money with.

After you have found a fund manager you can rely on, just look through all the fund objectives and pick one that you understand most or have the highest hope for.

Why so many hates & loves with mutual fund ?

When the series of mutual fund articles were initiated, a lot of contradictions are raised. Some are intended and some are not. Here are a list of them in respond to Mutual Fund is the Highest return Passive finance tool, Don't Buy Low Sell High in mutual fund ?

1. Fund managers are incompetent
2. The only people who gest Rich are those agents, not the investors!
3. mutual fund fee 5-6% are terribly HIGH!
4. mutual fund returns are LOW!
5. mutual fund is NOT a PASSIVE investment, you may as well buy stocks!
6. Buy Low Sell High is applicable in mutual fund, why should I keep the fund knowing the price will drop?
7. Mutual fund cannot be compared with FD, their risks are different!

It is no surprise why many will hate mutual fund as well as some loving it. Lets revise the wealth pyramid again.

Fix Deposit / Bond are generally acceptable as a worry free saving while stock investment is generally understood as risk is involved. Guess what, Mutual Fund sits in between them and actually is the only personal finance vehicle that transition from one to another. So by its nature, there will always be some confusion and conflicts in mutual fund. What FD people likes about mutual fund is usually what derivative investor hates about, what a stock investor likes about mutual fund is usually something a FD guy would not agree.

At one end, mutual fund is like a FD, on another end its like a stock investment but actually it is Neither of them. So you cann't compare mutual fund with FD and yet you could, like wise with stock investment.

There will be some articles addressing some of the concerns raised above, but below are the short answers.

1. If you look at the world's best investors of all time, in average they out perform the market by 6.46%. This includes Warren Buffet, Benjamin etc. Most of the fund managers may not be as good as the Gurus, but their past historical performance is not that far apart.
   
   Most people who curse at fund manager's competency are due to their unrealistic expectation. Some ofcourse is due to their own unhappy experience. Either ways, generally fund managers' performance is at par but definitely has room to improve.
   
   
2. Let's face some factual figures. The most a mutual fund business can squeeze out of the investors are the 5-6% no matter how they distribute among their agency force. Insurance can be up to 40% while MLM structure usually allocate more than 55% in similar distribution.
   
   So if one is worry his agent gets richer just because he invest, mutual fund is probably NOT the first and major concern relatively.
   
   
3. The 5-6% High Fee is VALID but may not be as bad as it was described. For example, a comparable stock investment with 0.7% fee could have an effective rate of 2.31% vs the mutual fund's 5.5%. So buying one mutual fund is as if buying 2 stock counters.
   
   
4. See 1). Get the expectation right. No one becomes rich because they buy mutual fund. But when done right, many retire wealtheir than they initially thought of.
   
   
5. Yes, mutual fund CAN BE an active invesment like in 6). But MalPF preaches not to use it that way, one should use mutual fund the PASSIVE ways.
   
   
6. If you know the timing of a market trend, mutual fund and dollar cost averaging concepts is NOT something for you. Buying a stock can give you exercise your timing concept with lower fee. This is an example of how to.
   
   Are you sure you are not an agent earning commission when you encourage people to speculate using mutual fund ? Are you sure there is no conflict of interest with your clients portfolio ?
   
   
7. As mentioned above, the top part of mutual fund ie. equity fund cannot be compared with FD but the lower part of mutual fund ie. capital guarantee fund, money market fund etc. CAN.

Do you hate or do you love mutual fund ?

Choose a mutual fund using numbers ?

Making investment decision based on historical records is NOT the best way. However, it is one of the FEW methods that is measurable. This method cann't say much about the future but it absolutely show evidence to what they have promised before ie. the goal of the fund itself.

There are 38 mutual fund companies in Malaysia, more than 530 funds have been launched in the market. There is about 160 billion ringgits Net Asset Value all together. Making it the largest component (20%) in the whole Malaysia stock market.

Below shows all the funds performance information for 4 companies;

Public - 67 funds,

OSK - 34 funds,

AMB - 15 funds and

TA - 16 funds.

That is a LONG list to look at. However, if we focus on a few criterias ;

1. Funds that are more than 5 years old

2. Funds that have received good ratings from 3rd party

3. Equity or moderate to high risk fund, ie. exclude bond and income

More than 75% of the funds can be filtered out immediately!

Then just plot some graphs to look at each of the remaining funds, try to see if one is MORE "Apparently Better" than another.

This is the short list result from this exercise;

PB Growth

Public Growth

Public Ittikal

Public Regular Savings

Public Savings

AMB Ethical Trust

AMB Value Trust

OSK-UOB Equity Trust

OSK-UOB Kidsave Trust

TA Growth

TA Islamic

Still a long list to work with ? One may further compare the funds and pick the highest return fund, but that is Highly NOT advisable. Playing with numbers any further than this stage would be considered as obsessity and may result totally irrelevant investment decision.

This list tells the following;

1. These funds have been managed well. The reasons could due to talent, regulation, the goal of the funds ... no matter what the reasons are, they have been managed well for the past 5-10 years.

2. They have performed BETTER than other funds in comparison.

It may also carries these implications:

1. It is unlikely these funds just get lucky continously for 5-10 years

2. Despite all the potentially bad things that may happen,

However, the list DOES NOT mean these ;

1. These are the best funds,

2. These are the funds to buy now,

...

Mutual Fund, Buy-Sell or Buy-Keep ?

There are mainly 2 different schools in mutual fund believers.

1. Apply Dollar Cost Averaging, (DCA) put in money consistently for a long long time. Never take it out until you die, retire or you initially planned to. Lets call this Buy-Keep technique.

2. Buy Low Sell High, when market is bad, buy more, when market is good, sell them to take profit then buy again when market is low again. This way you maximize your return, the more you roll the bigger you get. Lets call this Buy-Sell technique.

There may be some simple answers : (a) Its really a personal preference; (b) If you know DCA you use DCA, if you know the market, you use Buy-Sell techniques. But at the end of this article, there may be a distinctive answer NO MATTER if you have a preference or understand anything on DCA and the market.

DCA is boring. All it says is you save a FIX amount of money PERIODICALLY. It doesn't tell you when you can take profit, when to withdraw. It doesn't care what the market is doing now. It just say save, save save ...

The good thing about DCA is it is simple. You just need to know (1) the amount and (2) the period. And both of these parameters are 100% under your control. You decide the amount and you decide the period. Another good thing about DCA is it is usually 'cheaper' - as low as $50 or $100 for each transaction.

The good side of DCA's simplicity can also be viewed as its disadvantage. Simple may also be viewed as lack of abundance, or in this case, ignorant. Admit it, its kind of stupid to think that if I want to earn money, all I need to do is to decide the amount and period !? Having said that, DCA is not really easy to implement neither. Simple concept is NOT always Easy to execute persistently. Unfortunately This has been statistically proven.

The good stuff about Buy-Sell technique is its exciting. You may read news, find info, analyse finance data or even play with charts in order to know the up down of the market. You may even be very well verse in some particular industries that you have secretive insider knowledge. Either ways, it is exciting. You may be able to gain big profit when your decisions are right.

The unhappy moments of Buy-Sell technique is when your intrepretation of the market is wrong. Or may be you are still right, just that the market goes the other way. It could be big guys play you out, natural disaster or simply that you thought you knew but actually you didn't. On this method, you will need to spend some effort to analyse the 'timing'. You need to know when to buy and you need to know when to sell. If you spend too much time on the timing, it may be disqualified as a passive income generator afterall.

If you are reading sequentialy, there may not be any apparent answer yet. It still seems like a preference issue.

Lets look at the risk-reward of both techniques. In long run, DCA seems like to be able to cushion the risk, but it would also provide lower return. So relatively, it seems like a lower risk lower return. Buy-Sell on the other hand is very investor dependant and therefore high risk high return.

Athough a weird dude run some numbers and said that in DCA, when you lose, you lose less and when you win, you win more. But in this context, Buy-Sell technique would still provide higher return than DCA while carrying more risk. Buy-Sell technique can also claims that the longer one practise it, the more experience one will gain and therefore, the longer it is the higher chance one may win. ( hardly a truth neither )

Ok, by now can you see any distinctive answer yet ? If not, then we will have to run some numbers again ...

Says you use DCA method and put in $1,000 a month for 5 years. You would have put in $60,000 in total. If you are paying 5% charges, the total fee you have paid is $3,000 through out the 5 years period.

On the other technique, lets say you buy-sell twice a year, that would be 10 times in 5 years. Assuming the average of each transaction amount is the same as your initial capital, $60,000. The total fee you have paid would be $15,000. Equivalent to 25% of your initial capital. Comparing to 5% from DCA method, this method is disadvantage by 20%, not in practice, but in strategy.

So if out of the 10 times you buy and sell, your total lost-win ratio is 50-50, then you would most probably ended up with performing 20% lower than DCA method ( not really, read on ). In other words, in order to eliminate this potential strategy short fall, your lost-win ratio should be at least 40-60 in order to break even. ( Conceptually, not exact by numbers because other parameters are needed for full calculation ).

Another way to put it, if you earn the SAME return in both techniques and you have a net profit of $1 in DCA, Buy-Sell technique would have given you $0.80 only.

If we go back to the fundamental in mutual fund is that we pay HIGH fee for professional services. If after paying them such a HIGH fee, you turn around making your own calls. It would be equivalent to wasting all the HIGH fee you pay them at the first place, wouldn't it be ?

No doubt Buy-Sell technique is a good method but why would you ever want to pay 5-6% fee comparing to other tools that charges less than 1% and yet allow you to buy sell much easier ?

So no matter if you have a preference between Buy-Sell vs Buy-Keep, no matter if you really understand DCA, no matter if you know the market, you should NEVER apply Buy-Sell techniques in mutual fund.

If you still insist to Buy-Sell mutual fund, then please understand this formula ....

The only scenario where Buy-Sell mutual fund is NOT strategically disadvantage is when you found a particular fund that already has a large number of stocks that you planned to invest into anyway. In that case, there is a chance that the 5-6% high fee is average down by the number of stocks until it is even LOWER than the stock invetment fees.

Mutual Fund is the highest return passive finance tool

Mutual fund is one of the personal finance vehicles that can provide us highest return with managed risk and yet do NOT require us to really know much about it.

According to malpf's wealth pyramid, Mutual Fund is at the top part of the pyramid, only below Shares or stock investment. However, the distinct difference between mutual fund and stocks is that stock would require you to REALLY learn 'something' about it before you can "consistently" gain from it. While in mutual fund, you can still gain from it no matter if you know or don't know much about it, almost like a Fix Deposit (well, not exactly).

Basically when you put your hard earn money into mutual fund, you are 'trusting' the fund manager who is certified as profession by your country, will help you maximize return for you. Although such certification could be questionable, but the chances to go wrong is way less than those who are NOT certified.

The key component in a successful company is the boss, the key to a stock is its CEO so the key to a mutual fund is its fund manger. It has been emphasized before that you should follow the fund manager, not the fund itself.

There are only a few key components when investing in mutual fund;

1. Fund Manager : who make the decisions for this fund, have they been performing well ?

2. Objective of the fund : what this fund will and can invest into ?

So if the fund manager or the company is 'somewhat' reputable and the fund's objective matches your own personal view point, you can rest assure to put your money into that fund.

Not as easy as Fix Deposit where you don't need to worry about above 2 questions but 8-12% potential return (mutual fund) is very much higher than 2-5% return (FD). So the effort needed could still be considered low, while the return could be high and continous - as a passive income.

Even if you do not know the fund manager NOR the objective of a fund when you invest into it, it is still NOT as bad as in stocks or businesses. When the right strategies are applied, what you have got yourself into is just lower return as the price of ignorance.

Having said that, its not a totally worry free finance vehicle. These are the common problems of mutual funds which are valid;

1. Expensive or High Fee Charges .... 5.5% is charged when you invest into equity mutual fund, as compare to stock's fee at 0.7% and Fix Deposit at 0% or NO charges. ( read here for comparisons of mutual fund with FD and stocks , compare mutual fund and stock's fee)

2. Fund managers have restriction to maximize return. ( why ? )

3. Unit price can still go down as well as up, so the so called 12% return may not be realized after all.

... and many more ...

There are also many different views on mutual funds ...

1. People who want to get rich, had experience in stocks or properties usually distrust on mutual fund.

2. Some active mutual fund investors buy and sell as often as they can, "keeping the fund will NOT earn us anything", they think.

...

However, ALL issues raised on mutual fund can be settled with only TWO strategies ...

1. To buy or NOT to buy

2. Dollar Cost Averaging

... more will or may be posted on each of the concern above ....

Other related articles

insurance vs FD vs mutual fund

use mutual fund to practise Buy Term Invest the Rest

minor differences between mutual fund vs unit trust

Mutual Fund vs Unit Trust

Practically both the terms Mutual Fund and Unit Trust can be used interchangeably in Malaysia but there could actually be slight differences between the 2.

Mutual Fund is more a USA term while Unit Trust is a UK term.

Instinctly implied, Mutual Fund is just a pool of collected investment money. The money is usually pooled for a specific purpose. Its also implied some special people are 'in charge' of the pool of money to achieve the purpose.

Unit is a special measurement method when there are more than one type of items to refer to; And yet one needs to use ONE system to measure all the items. So generally instead of gram, meter etc. 'Unit' is used instead. Trust instinctly implied confidence and someone who we can rely on. So Unit Trust is basically a 'system' you can rely on while it may consist of multiple elements in it. Despite its potential complexity, it should be easily understood by using its 'unit'.

As you may see by comparison now, Mutual Fund does not necessary have to have the Trust element in it. Unit Trust on the other hand, doesn't have to have more than 1 investor. In short, I can pool up all my friend's money and invest for them as a mutual fund. Nonetheless an illegal one because such activity require licenses in most part of the world. On the other hand, I can use part of my wealth to set up a unit trust to earn money from Melbourne real estates.

A little more than just layman talks

Trust is also a finance term where a 3rd party is brought into the transaction between 2 persons, acting as a balance entity fullfilling the interest for all. For example, Sandy has a oil mill that she wants to pass down to Benny but Benny doesn't know anything about it. So Sandy passes the ownership to Tan with the agreement that Tan will manage the whole operation but pass all the benefits to Benny.

Sandy is usually caleed the Settlor

Tan is Trustee

Benny is the Beneficiary

Usually Tan will charge a service fee and usually only large and stable finance institution can be considered as the real Trustee.

There are also some sayings that Unit Trust is part of Mutual Fund because Unit Trust is basically a Mutual Fund that has an extra element of Trust in it. The reason why both of these terms are used interchangeably is because all legitime Mutual Funds must setup a Trust in Malaysia. Which mean the fund company can manage the money but can NEVER take the money to their own possession as its own by the Trustee, not them. That way, the investors' money is safeguarded.

Frequently the corporate finance guys may also refer Mutual Fund and Unit Trust as Open End Fund. Which basically means investors buy and sell directly with the Fund Manager without the need to worry about other investors.

Personal Finance in 1Picture

I started this Blog with very fundamental talks on personal finance on lay man write up. I have to apologize if recent posts have become quite cryptic and speculative. So let’s get back to some of the unfinished fundamentals on personal finance.

First you must have an income. Income can be any form of received money including pocket money for kids, household money received from bread earner, begged etc.

No matter how you get your income, you must setup an automated system to save part of your incom; BEFORE you do anything else ! Remember you need your ASS - Automated Saving System.

In today standard, this automated saving system should give you some interest, preferably matching fix deposit rate.

No matter if your income makes you a Rich, Average or Poor person, if you don't have an ASS you may find yourself in trouble one day. Some even cost them their lives.

Once you have enough money in your ASS, ie. can substain your lifestyle for 3, 6 or 9 months. You will need to start thinking about Money Earns Money - MeM. 'Passive' is the keyword. Something that you do once now and enjoy a life long extra income in future.

There are standard methods or PF tools to achieve MeM. Each level up the pyramid requires more learning. Entering into any of this with the wrong preception or knowledge may bring negative MeM.

At this stage, many will tell you high risk high return, low risk low return. While they are not wrong, but that concept is not entirely helpful to your personal finance. In order to focus on what can helps, you may need 21st century understanding on Risk.

Further in future, you may see that MalPF will preach that

1) Personal Risk is what you know, the more you know the better it is, irrelevant to what PF tool it is

2) PF Tool Risk is fixed no matter who invest in it, irrelevan to who you are

Bundle together that 2 concepts result one simple action to position yourself well in MeM - keep learning ( the easy part ) and learn the right stuff ( the harder part - due to Rich Conspiracy ).

There are 2 BIG parts in MeM. The part mentioned above is Earn 2 with 1 or Doubling your money - MeMx2 The crucial part left out here on purpose is Time - which is also the variable for individuals.

We use Rule of 72 to quickly calculate this variable. For example, it takes 6 years to double my money if I get 12% return from my investment.

So far MalPF model works well without the need of setting goals. However MeMx2 is the part where you may see a distinctive difference between a person do it with goals and another without.

Should one still find it hard to find own goals, simply follow the magic number - 7. Setup 7 MeMx2 accounts for the following:

1. Car

2. House

3. Family

4. Education

5. Retirement

6. Charity

7. Holiday and Travels

The good thing about none goal specific MeMx2 is that they are flexible and interchangable. You should start all 7 accounts at once even if you think you don't need it. Even putting in 1 cent a month into each account is better than putting 10 cent into one investment account only. ( No, this is NOT diversification, this is just broaden your availability when you don't have a target, like spreading a fish net when you don't have a hook/bait )

The second part of MeM is to Buy 100 with 1 or Secure Future Money - MeM100. Also commonly treated as insurance. While MeMx2 urges us to learn more, gain more knowledge but there are always something we haven't learned yet or will never able to 'finish' learning. Hence for all the stuff we don't know, we apply MeM100 to it.

This is especially useful when you have goals in MeMx2. For example, I want to save $100 a month for 20 years with 12% return so that I can get my $100,000 for my retirement. So I can buy a $100,000 insurance just incase if I lost my ability to save that $100, I will still get my $100,000 regardless.

There are 5 big areas in MeM100:

1. Die Early

2. Living Dead

3. Fail to Die

4. Accident

5. Income Replacement

If you still don't have clear goals in life up to this stage. Then you will not be able to have an optimized Personal finance plan ie. Buy Term Invest The Rest. You would probably go for something traditional called Whole Life Plan. Its not bad at all for someone who cann't even figure out a single goal after 20+ years of life. Try This ...

and this is what this picture is all about ... ( may be not All but the nutshell yes )

Mutual Fund vs Stock fees

Typically equity mutual fund service fee is 5.5% and stock investment is 0.7%. Other than that, another significant difference between them is that mutual fund normally require a minimum investment of $1,000 whlie stock usually charges a minimum fee of $40.

	Mutual Fund	Stocks
Minimum Imposed Fee	None	$40
Minimum Investment Amount	$1,000	None

( Mutual fund fee could range from 1-2%

while stock investment can be as low as 0.05%

but those are not really apple to apple comparison )

So first of all, this $40 minimum could become the first trick in your invesment. $40 fee to a $1,000 investment is 4% alone. In stock investment, the fee is per transaction if buy and sell on different days. So a total of $80 out of $1,000 is 8% !! In stock investment, you must understand MOTS : Minimum Optimized Trading Size especially for speculators in order to really enjoy the low percentage fee as advertised.

In addition, this 0.7% is not the only fee imposed for stock investment. This 0.7% is called Brokerage fee. There are also Clearing fee and Stamp duty. Clearing fee is usually 0.04% and Stamp Duty is $1 for every 1,000. However, when you use 0.7% as the brokerage fee, other fees are small enough to be ignored. This is not the case when your brokerage fee is the lowest like 0.05%, then you effective total fee would easily become 0.18%.

Mutual fund on the other hand is simpler and straight forward. ( they charge much higher fee, ofcourse they should make our life easier )

Meaning when you invest $1,000 into a mutual fund, $55 is paid for the service. Assume there is no market movement and you withdraw immediately, you will get back $945.

Says you buy a $3.08 stock with $5,901.30 ( just slighly more than MOTS), your effective fee would be about 0.84% per transaction or 1.68% in total. But assume if you sell it without any market movement, you will have to find a buyer. So withdrawal is not as automatic as mutual fund. If no one wants to buy your shares when you want to sell it, you will NOT be able to liquidate your invesment !

Lets assume you got into a high volume stock where liquidity is not a problem at all. But you may NOT be able to sell at $3.08. There is always a buy and sell spread. Basically how much you can sell depends on how much people want to buy from you. Anything from $0.005 onward is possible. But in a liquid sell, the sensable price you can sell is most probably $3.06. The 0.02 difference is called the tick size and you can learn a bit about them on this post. Note that when your selling price is $3.06, your effective fee rate becomes 0.85% and not 0.84%, an ignorable difference but nevertheless different.

So to wrap this up, you will get back $5,764.98 if you sell immediately of the stock you just bought ! That is an equivalent of 2.31%

So now you can see how a 0.7% turns into 2.31% in stock investment even when you are senstive about MOTS.

Mutual fund ? Its still at 5.5%, not much trick there. Simple and straight foward.

So it is NO Doubt Stock fee is much lower than Mutual Fund fee but it may NOT be as low as you think it is.

Investment Type	Published Fee	Put In	Get Back	Effective Rate
Mutual Fund	5.5%	$1,000	$945	5.5%
Stock	0.7%	$5,901.30	$5,764.98	2.31%

You may also be interested in these articles

Number of Stock transactions may affect fees% when compare with a mutual fund

Insurance vs FD vs Mutual Fund

Myth of Putting All Eggs in One Basket - Diversification is Bad ?

Fund Managers are Lousy - same problem different size means different problem

Why Fund Manager still lost money even when they know they will ?

Calculate how much is a stock wroth buying

How to earn in stock market no matter up, down or side way

or read all about mutual fund articles here

or read all about stock articles here

One of the myth not answered yet

due to lack of commenters :

not all stock prices are created equal

WHY and WHAT we can do about it ?