And This Is Supposed To Be Good Investment Advice?

By Anna Johnson

The other day my husband told me about an article he saw in a popular investments magazine.

The article featured a couple of investment advisors advising people on how best to save a down payment for a house.

Well, when my husband told me what these advisors suggested, I nearly coughed up my yoghurt. (And that wouldn't have been pretty!)

Did they suggest saving a certain amount of money each week, (or fortnight or month) in a relatively safe investment, like a high interest bearing bank account? So that by the time it came to buy that house, there would be enough money for the down payment?

Nope.

The first investment advisor suggested investing the money in a mutual fund. He said that, over time, the return would be greater than say, putting the money in the bank... which meant there would more money for the down payment.

Okay...

The second investment advisor went even further. He suggested not only investing the money in a mutual fund, but also borrowing against the shares in the fund, and reinvesting the borrowings back into the fund. This would generate an even greater return as the investor would take advantage of the wonders of leverage.

Hmmm... is it just me, or is there something rather important that these guys are NOT saying?

Like the fact that there are mutual funds... and there are mutual funds...

They all vary in terms of their expected return and risk!

Some funds - "balanced" funds - are weighted heavily towards cash and while, over time, they generate lower returns than funds which hold a high percentage of their assets in common stocks, these balanced funds are also less volatile (risky).

Mutual funds that invest most of their assets in common stocks - and certainly index funds which are linked to stock indices - have historically generated higher long-term returns than balanced funds, and certainly higher the average bank account.

But when I say "long-term", I mean 10, 20, 30, 40 plus years depending on which historical period we're talking about.

Within a shorter period of time the performance of any given mutual fund can vary incredibly. It's certainly not unheard of for the value of the fund to DROP within that time period.

Now... when you have a specific goal, like having a certain amount of money for a down payment... don't you want to make absolutely sure that when it comes time to make that down payment... YOU HAVE THE MONEY?

So if you start investing your hard earned money in a high growth mutual fund with a view to buying a house in a couple of years time... what happens if the stock market, or your mutual fund, takes a dive just when you want to buy your home?

Bye-bye down payment.

Of course, if you don't have any plans to buy a house for 10 or 20 years, then maybe investing in a high growth mutual fund or an index fund is a superb idea...

But if you have a shorter time horizon, and want to make absolutely certain that you have the amount of money you need when you need it... I suggest being much more conservative.

Frankly, I wouldn't even look at it as an investment at all. (I actually don't think your own home IS necessarily an investment or asset, but that's another story). I would treat it as a specific purchase that you need a specific amount of money for, and SAVE that amount of money accordingly.

I know, I know. House prices could go up. Interest rates could go down. There are still variables that will affect the value (or buying power) of the money you save... but, when it comes to your down payment, do you really want to add even MORE variables like the ups and downs of a given fund manager or the stock market?

I just don't think that's sensible... and I don't think the advice of those investment advisors was complete.

Which is just more proof that the financial media is far too busy dishing out quick investment "sound bites" and touting the latest "hot investments"... rather than giving people a logical, practical and effective framework for making investment decisions in the first place.