swanfinancial is thinking about….

Managed funds make money when the value of the stocks they hold in the fund increase in value. Just because there is a recession does not mean that all stocks will decline in value. In fact, a company could improve it’s bottom line during a recession and it’s stock value could increase. If a fund holds stocks in companies which manage the slowed economy well, then the fund could increase in value. This is just as true as saying that during an economic boom a company’s stock might decline in value because of bad management, and funds which hold this one in their portfolio would obviously decline as well.

This is the reason some funds limit both the amount they hold in any one company, and the amount they hold in any market segment. It is one of the great values to having a Seg Fund as an investment versus personally owning stocks. The Fund allows you to spread the risk over a larger number of segments and stocks, as well as providing you with professional selection.

With all the talk these days of a possible/pending/likely/but maybe not recession, it seems to me that news reports do a poor job in their headlines when they report economic news. While the words might be technically true, the real story is usually not told either in the headline or in the body of the story.

When I read a headline that says “Bank Profit Falls 40%” I know that does not mean the bank is losing money. They are still making a profit, just less than last year (when they increased their profit by 30%). The reality is their profit may have slipped only 10 % over a 2 year period. Hardly cause for alarm to anyone but the CEO who’s bonus might be cut by a few million dollars.

I was at a meeting recently where an overview was given of how a Seg Fund company invests their clients money. You always learn at these meetings some tidbits of information which are revealing of how the funds work.

For example. they had invested in two stocks in 2006 which they sold in 2007 after they had increased in value 100%. Unfortunately they continued to increase after the company sold them. The point they were making is that buying and selling has to be disciplined, and they sold when their established procedures said it was time to sell.  The subsequent increase in the stocks value came as a result of unexpected events (such as a natural disaster) which they could not predict.

 They also explained that while their international funds had increased in value, the Canadian dollar has also increased in value. International funds are frequently held in US funds, so the increase in value of the stock portfolio was offset by the decrease in value of the US dollar.

For obvious reasons I am not saying which company meeting I was at, and which stocks they had bought and sold, but as an old shopkeeper acquaintance of mine always said, “Trust Me.”