Posted on 09 January, 2010 | 65 Comments
Paying someone to invest your money in mutual funds is akin to paying someone to pump gas into your automobile. You used to do so years ago, but in this era, very few any longer see value added in doing so. In a large way, mutual funds have outlived much of their usefulness.
Mutual funds were more valuable to the investment community years ago when neither discount brokers nor exchange traded funds existed – not that mutual funds have ever been great investments.
The primary value of a mutual fund use to be that it provided diversification to the investor. But with the plethora of discount brokers in the market and trading fees that are in many cases as low as a penny per share, investors can often achieve their own diversification with less than $20,000 in their bank account.
Furthermore, do-it-yourself investors can now purchase index funds or something known as exchange traded funds (ETFs). With index funds, an investor will never beat the index but neither will the portfolio underperform.
In comparison, the vast majority of mutual funds (close to 80%) underperform their respective index. Not a surprise when you realize that a mutual fund has to outperform the index by at least its management fee. With average management fees in the 2.5%-3% range — that’s a whole lot of ground to make up. So, it should be no surprise that very few mutual funds do well over a 10 year period.
What does surprise me most about the mutual fund industry is just how successful they have been at integrating themselves. I cannot tell you the number of intelligent and sophisticated individuals who have no idea what kind of fees they are paying on mutual funds held in their portfolio.
On the other hand, how surprise should I be especially when the industry is able to keep fees hidden from the investor. Heck, most investors don’t even realize that a “trailer” fee (aka: kickback) is given to the salesperson.
As an investor, you want the most direct path to the individual who is doing the actual investing, which is likely to be a portfolio manager with a passion for the markets, not an agent who sells funds, who’s passion is for asset gathering and sales. I acknowledge they are excellent salespeople, and very smooth. They will often have a glib and sardonic response to everything I have mentioned.
If you have made the decision to invest in mutual funds, you should only do so with exchange traded funds. The banks can help you set up a self-directed brokerage account where you can easily buy and sell these funds yourself. Unless you have a penchant for paying fees, please do not use a bank advisor to purchase mutual funds for you.
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