Now is a good time to buy Canadian mutual funds

Recently, we’ve heard from some investors who sold most or all of their stocks and mutual funds during the recent downturn.

Now, a number of these investors want to get back in, and many are considering Canadian mutual funds. But they wonder whether they should buy now or wait to see if the TSX, which has climbed over 40% from its March 2009 low, will fall again and offer lower prices.

Know your time horizon when buying Canadian mutual funds

In deciding whether to buy now or wait, however, many investors focus on the market outlook. But it’s the one factor that offers you the least advantage in making a decision. That’s because nobody knows for sure what the market will do.

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When you make that buy-now-or-later decision, you’ll probably look at several factors, and not all are equally helpful.

Your main concern should be this: how soon will you need your money? If the answer is one year or less, the stock market is a bad place for you, even if you invest in mutual funds we rate as conservative. After all, if the market goes into a dive right after you buy, you don’t have the option of holding on for a recovery in prices. On the other hand, if you can afford to hold for five years or more, you’re almost certainly better off to buy now rather than wait.

Remember, the main alternative to investing in the market is to hold interest-paying, fixed-return investments of some sort. Over long periods, high-quality mutual funds are bound to outperform these kinds of investments. That’s because returns on interest-paying investments are related to interest costs. Business profits have to exceed interest costs in the long term. Otherwise, businesses that owe money would all go broke.

Our view: the market is more likely to go up than down in the next year, say. If you can afford to hold for a year or longer, now is an especially good time to buy.

However, we continue to think that you should stick with high-quality companies, well diversified across the five main economic sectors, or in mutual funds that hold those stocks. You can get our latest mutual-fund selections in our new special report, Mutual Funds Canada: Inside the Top 10 Canadian Mutual Funds. Click here to learn more.