28.11.2020

How to Improve the Profitability of an Investment Fund?

Do you have investment funds? I suppose that if a bad run in the markets has caught you with money invested in some fund, the first thing that will have come to mind is to think about whether to sell or keep the investment. But surely you have not even thought about how to improve the profitability of the investment fund in which you are invested.

Many know the theory. That you have to invest in the long term, that market volatility is normal. That there has always been a crisis, but it always comes out, etc. But there is a friend. When a few bad sessions come with significant falls, the weeks become eternal, and it is not uncommon to doubt all that one had very clear before.

The truth is that these moments are sensational occasions to improve the profitability of any investment fund. But few people see it. What I want to make you understand is that it doesn’t matter where you invest, that you can always improve the manager by taking advantage of market movements. Especially the descents.

The risk of the entry point

One of the worst things that can happen to you is to invest in a fund that had an overvalued portfolio or with little potential just before a stock market debacle and take a strong hit position in a static way. No matter how good the manager or the management team is. If the market falls, you will suffer significant losses.

Many times we stumble on this error because we are looking for the best fund of the previous year. And sometimes there is nothing that evaporates your savings faster, than investing in the last fund five stars with excellent past returns.

Even so, not everything is lost. There is something you can always do, and that usually works in almost all investment funds.

How to get more profitability with your investment funds?

When you invest in an investment fund, I imagine you do it because you expect it to behave favorably in the future. Among the things that you can rely on to make your investment decision, you are sure to look at past returns, commissions, manager’s history, and whether or not they have invested their own money in the fund.

Well, the normal thing is that in the long term, that fund ends up above where it is unless you have the bad luck of entering a moment before a crisis or a cycle change. In which case, you will need to spend more time to achieve your goal.

As it is very difficult to predict what the markets will do if not impossible, you can be wrong. No one really knows what a stock market will do in a month, a year, much less in ten years. But it is known that more or less cyclically, things tend to return to their channel sooner or later when they get ugly and revert to the average when it has risen a lot and for a long time or vice versa.

That said if you are able not to try to be smarter than the fund manager when things get complicated, and instead of selling to try to go lower and catch the climb, you stay invested and buy more in the falls, It is possible that you are doing well. Well, in fact, you will do better than the fund manager from the moment you entered until you decide to leave if when the fund falls, you add more money.

Normally people do the opposite. When the bags fall, they get scared and sell. On the one hand, to be calmer and cut anxiety and on the other hand, by naivety. People often deceive themselves by saying that it is better to leave now, and they will enter below when things calm down. But when there is a lot of volatility, things can change in a very short time, and normally if you do this, you can stay out of the rebound and have no choice. The loss will be final. He also thinks that the fund manager is already actively moving the portfolio and will have made the adjustments he deems appropriate.

The case of the fund of Peter Lynch, one of the best investors in history, comes to mind. That obtained yields of 29% annualized for more than a decade. While the vast majority of the fund’s participants had losses or a return even lower than that of the market, it was a period of high volatility, and many investors entered and left moved by fear during the falls. It is a very clear example of what I want to make you understand.

You can be invested in the fund managed by the greatest genius of the decade, that if you don’t know how to control your emotions, you can end up doing stupid things that eventually make you lose money.

The market timing does not work. It is best to remain invested, and if you have liquidity, buy more with the falls. It’s that easy.

If you take any fund, select a random period and make an analysis of what would have happened if you had put some more money at the midpoint of the falls (not even I tell you at the lowest point), you will see that the graph of your performance will gradually take off upwards from the profitability of the fund itself. And you will improve the result.

This anti-intuitive behavior can be tremendously profitable in the long run.

How to improve the profitability of your investments?

I subscribe to the words of John Bogle when he says that simplicity is the key to success in investments. It is not necessary to complicate it much less.

I summarize it with the following road map. Choose a passive or active global fund, which you think is well managed by a good manager that you have reasonably low commissions. Do not invest everything at once because you never know when is the best time. But start as soon as possible to favor the effect of compound capitalization. Go adding the rest of the money little by little during the falls and the same with the money that you save in parallel over time. Stay firm and be patient. Celebrate the falls as if they were the January sales. Never try to guess the market movements. Do not look at the valuation of your investments very often. And jump if you need it when you consider that your investment objective has been met. Do not be greedy.