Once again, this is not financial advice and I am not a financial advisor. Following the interest I have received in my latest article, here’s some background knowledge that is necessary for anyone wanting to understand financial markets. The very basics of the get-rich schemes that rich people use to make more money out of their money in the financial markets. Fund managers in Malta who have a conflict of interest by simultaneously acting as financial advisors will entice you to put your money into their own funds when in reality they are underperforming the market badly, and will not tell you a basic secret that they know which is historically true and basic knowledge in the history of finance. The secret is summarised in popular jargon by financial professionals which goes like this:
Stocks always go up.
Not all stocks go up. Some companies will fail, and some will never grow but the stock market has historically and consistently kept growing through time. So, to be more precise, one would have to say, that historically, stock markets always went up.
Mostly, when financial professionals speak about stock markets, they are speaking about the US stock markets which are the biggest in the world. This is a natural historical occurrence. When the British Pound was the dominant currency in history, the stock market was in London. Today it’s in New York. So, by default today, given that the US is the largest economy and the Dollar is the most widely used currency, its stock market is the biggest in the world. Here I am trying to be simplistic because I know some financial professionals who will bark at me saying “the economy does not affect the stock market” so I’m not getting into that at this moment. For now, it is important to clarify to readers that the biggest stock markets in the world, during their global currency dominance, have always and consistently gone up. Let’s take a look at the US stock markets from the last century when the US gradually grew to become the dominant global economy.
As you can see, stock markets have always gone up and investors can buy these indexes directly with the aim of making a safe and constant return as opposed to having investments in particular funds or shares that can go wrong or blow up by human error. The aim of an equity fund would have to beat these markets unless it is specific to other regions. So far, no local Maltese fund is beating these indexes in most time frames.
Sometimes the aim can be to absorb those big dips since people are interested in equities but not ready for the bumpy ride which will result in the big increments. When the markets shoot up, the funds won’t make the most of the increase but when the markets crash, the fund softens the drop. I think you are taking a very simplistic approach to how the markets can be tracked, leaving out the investors aptitude to risk.
For example I do not mind having my portfolio currently losing 25%, cause I see the long term which you are showing in your charts. Others might go crazy
Many of the funds mentioned did worse than the market when it was going down. For lower risk supposedly there are government bonds. What you are saying doesn’t make any sense at all.