Many claim that they are investors the moment they put money / funds into an investment instrument, or feel they are investing (even if the instrument is short term). Are they really – investor or do they act like fund managers? Too many investing clients could hardly decipher the difference of the two whenever I pose this question. The thought that they are managing their money into financial and real assets, they succumb to the idea that they are fund managers more than an investor. So what is the difference?
In the world where I came from, the mutual funds industry, these two are clearly different from each other. Fund management refers to the people or entity managing the funds and investors are the people who participate by putting in their money for the fund managers to invest. Fund managers analyzes the financial market to determine whether they will overweight or underweight their exposure to the equities market or shift duration on their bond investments. Fund managers follow strictly a set of guidelines when doing their investments, we call this- the prospectus of the fund. They are not supposed to go beyond the stipulations of the prospectus. They measure the risk they take. They have investment limits to follow provided by the law or set forth by themselves. Fund managers attempt to buy low and sell high. At times they take losses and let profits run. Their goal is to make money as much as they can while managing the risk associated with the instrument they are dealing with.
Here are the question:
Are these fund management protocols and behaviors being undertaken by the “investor”?
What then again is the difference?
How do investors should behave when investing in a manage fund?
First and foremost, investors should never run after gains or returns and have that mindset to earn as much as they can. This is going to be dangerous. Fund managers aspire to make as much as they can because they do not have deadlines. But not investors, they should know how much they need in terms of return to achieve their goal/s. And this is usually time bound. A financial goal clearly distinguishes the investors from the fund managers. Investors are driven by a goal and that is not to make as much money. A goal like an education fund, retirement fund, etc. Guided by these goals, investors should know how much return one should realize. The return of investment is incidental to the goal set and it is NOT the goal. For if it is, then one will continually chase for higher returns which could led to investing in high yield investment programs or worse – investment scams. The reason some people are scammed is because of the notion that they want to earn more. When supposedly, they have to earn the right amount of return suitable to them and to the goals set. Investors have time horizons, while fund managers don’t. Investors rarely have investment guidelines, fund managers do have one. Investors always measure return while fund managers measure the risk. Fund managers aspires to buy low and sell high while investors end up buying high and selling low. Fund managers are more logical, while investors tend to be emotional. Fund managers take losses as risk management tool while investors never imagined losing money. Fund managers analyzes the market prospectively while investors react to current news.
Fund management is a serious business sans a financial goal that an investor should have as top of mind consideration. The benefit of an investor knowing what a fund manager does in handling investment should be to have confidence that his/her investment funds are handled professionally and methodically. The job of the investor is to complement the fund manager’s objective especially buying low and selling high. A fund manager would like to see more investment funds coming at times when the market is soft or low and not when the market is high. This is the reason as investors investing in managed funds, should know that they help the fund managers by putting in more money when the market is low. It benefits all other investors as well. And lastly, not to take out money at the wrong time or when the market is low, by doing this, the fund manager has to sell low thereby realizes losses and puts pressure for the market to go lower.
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