For decades, mutual funds have been a hugely popular way for Joe or Jane Canadian to own pieces of companies. For years, I thought this was a great way to invest too.
Many investors still believe in this route and I can understand why:
- Mutual funds can provide instant diversification. Many people don’t have the cash to invest individually in a large number of companies so a mutual fund allows investors to own positions in a bunch of companies. If a few of these companies don’t do well, no problem, the rest in the fund should offset poor performers.
- Mutual funds can provide built-in professional money management services. Many people don’t have the time, energy or desire to research good stocks, when to buy them, where to hold them, etc. so professionally managed money helps people in this regard. Time has always been precious in our busy world.
- Mutual funds can provide liquidity. Many people, probably everyone at some point, invariably find themselves in some financial emergency and need money for something. Shares of mutual funds can be easily sold and you can get access to the cash; especially if you kept your mutual funds outside an RRSP where tax-deferred issues don’t exist.
- Some mutual funds can be rather inexpensive to buy. No-load mutual funds exist. These funds don’t charge any fees to buy or sell units but they do have operating expenses.
There are more positives about mutual funds but there are also negatives – some mutual funds cost you money, lots of it, in the form of huge money management fees. This is largely why I left the mutual fund industry – the costs and the fees were too much for what I needed. (Luckily there are new requirements in place to help investors make better investing decisions now – changes as part of the Client Relationship Model (CRM). Fees for performance matter. I’ll be highlighting CRM2 changes on this site soon).
What was too much in fees?
I was giving up about 2% of my hard earned money in fees. This is money I would never see again. I also lost my money to the following before the switch occurred from big bank mutual funds to indexed funds: load charges to buy the funds in the first place. Basically, I was paying to get into the investing game. Crazy when I think about it now…
After getting fed up about not knowing what I needed to know, after reading books, journals, blogs and more, I began to realize that most professionally managed money is at a massive disadvantage to the market’s returns – there is virtually no evidence to suggest there is any consistent stock-picking skill amongst most professional money managers over time.
With this realization I learned there was a better way to invest and I’ve now done so for at least six years: switching part of my portfolio from mutual funds to low-cost, index funds. These are funds that I can buy and hold in my brokerage account – indexed funds that trade on a stock exchange. You can find a list of some of my favourite Exchange Traded Funds (ETFs) here.
Over the last six years, I’ve retained more of my money previously lost to pricy mutual fund products and rode the stock market returns in the process – becoming a more successful investor because of it. Although my entire portfolio is not comprised of Exchange Traded Funds yet I won’t rule it out long-term.
What was your journey to lower-cost investing? Or are you still paying lots of money striving for market out performance?