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The recent Bernard Madoff scandal puzzled me a bit. I wonder if
mutual fund investment is “safe” anymore. The mutual fund investors have
enough financial set back due to the on going global financial crisis and
now, a big scheme delivers another blow to their already shaken
confidence.
I am sure none of us will be willing to give away money to a
stranger we meet on the street with the expectation that the stranger
will give us back a decent return in the future. Surprisingly, most of us
are doing exactly just that, with a different format, on a monthly, or
quarterly, basis when we take out a portion of our income to buy shares
in mutual fund recommended by our financial planner. We are told
investment is risky and we will be in good hands if we let the
professional doing the investment for us. We all know we are not in good
hands in this market environment despite what we were told.
When we buy a house, we automatically buy home insurance to protect
ourselves in case our house burned down so we will have money to build it
back. When we buy a car, we automatically buy insurance so we will have
our car back in case our car is stolen or has an accident. We may not
realize it but when we buy mutual fund, we are buying investment with no
insurance. Mutual fund is a one-dimension investment vehicle which gives
us profit when the market is up but provides no insurance when the market
is down. The current global financial crisis proves my point.
I was told option trading is risky and I blindly believe it until I
decide to learn option trading myself. Option is truly a risky investment
if we don’t know how to do it. If we understand option trading, it is a beautiful
investment tool to give us profit when the market is up and provides us
insurance when the market is down. To me, a stock trader is more
vulnerable than an option trader. A stock trader will surely profit in an
up market but he/she makes no money in a sideway market and will suffer
financially in a down market like the one we are currently experiencing.
On the other hand, a sophisticated bullish option trader will make profit
in an up and sideway market and has his/her portfolio protected in a down
market. The reverse is true for a bearish option trader. So, what is more
risky? Invest with insurance or without insurance? If I change the word
“invest” to “buying a house” or “buying a car”, I am sure most of us know
the answer right away. I am sure “invest with insurance” sounds weird to
some of us but if we understand option trading, we will have a better
understanding of the concept.
Nobody cares about our money more than we do. I sleep better at
night knowing I am in charge of my own financial future and best of all;
I am protected in a down market.
Dennis
Phan 潘家墉
Khai Minh, UCLA
and Investools Alumni
Los Angeles, California,
U.S.A., 3 December
2009
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