Mutual Funds: the best way to minimize your returns
I actively trade for myself and I am very good at it (my annualized returns in my tax free accounts was 70% last year). I know not everyone is a trader though. Not everyone has an understanding of economics, finance and markets. Most people don't want to be looking at numbers and charts on a computer screen. So because you're not an expert in an area does that mean you should hand over all control to someone who is? Many people would answer yes.
If you went car shopping would you just go to the nearest dealership and let the first salesman you see tell you what car to buy, ignorant to the car specifics and hidden costs because this person is an "expert"? Would you do the same thing with a real estate agent when looking for a home to buy?
I'm pretty sure all of you go into situation like that well informed. You compare prices, features, and try to get the best value for your money. So why don't people do the same with their investment money?
Paying a few thousand extra on a car or house a few times in your life is insignificant compared to the amount many people lose out on by not taking the same care with their investments. Too many people just take the view that they don't understand, don't know what to do, and just don't want to be bothered managing their money in any way. However, a little bit of time and effort can benefit you hundreds of thousands over the course of a lifetime.
I shouldn't have to tell anyone that piling all your money into savings accounts paying 1-2% or even worse just having it sit in cash is actually deteriorating your savings due to inflation so you'd actually be better off just spending it. My target here though is not overly conservative investors, because there shouldn't be any of you left at the current interest rate levels, even elderly and retired individuals need to have some exposure to better potential returns with other asset types. No, my target is the individuals who think they are wisely growing their savings with mutual funds, but are instead just throwing a large portion of it away. I concede my parents invested some of my money in mutual funds for me when I was a kid, and they did pretty much nothing, wasting many years of life's most valuable resource: time. Then when I was older they started by buying me a position in a Canadian bank stock, which also didn't do very well immediately, but then in the long-run was a fantastic investment. Then I started investing for myself and have experienced everything from stocks increasing tenfold to stocks going to nothing. So how can anyone know what is a good investment and what is a bad one? The truth is nobody can know anything for sure, all you can do is make an educated decision. For that reason why should you be paying 2.5% of your money to someone so they can try to be better than the competitors, who are also "experts" charging their clients 2.5%? In the end some of them will do well, some of them will do poorly, but the fact is that all of the "experts" will win because they get their 2.5% no matter what, and all of the "clients" will lose because they pay that 2.5% no matter what.
I have learned to be a good trader. My education, experience, and intellect all cater perfectly to finance. Even so, I am far from infallible. I make good investments, I make bad investments, I admit I have no idea what the future will hold and neither does anybody else in this world. I try to help people invest and earn strong returns through education and information, but I don't want someone else's money to invest for them and I won't give anyone a stock tip to throw all of their money into. I did briefly consider getting into financial services, but I knew the industry was just about being a salesperson and pushing the company's products to make the manager the most money, with the client as an afterthought. They don't want people with relevant degrees, experience, and abilities to make wise financial decisions for their clients, they want someone who can sell as much of their product as possible because they know that their product is basically the same as everyone else's, so the more clients they can get the more money they make. The best of these money making products is mutual funds. There are many different types, some that cover the entire index, some that cover a specific sector or company size, some that are domestic and others that are international. There really are funds of all different types, but especially in Canada we are limited to the number of stocks we can invest in. Therefore, large cap funds from different companies will have a lot of similar holdings, as will small cap funds, or energy funds, or any other type of fund. So why is your fund better than the competitors equivalent fund, or better than just buying an ETF that tracks the same segment of the market as the mutual fund with almost insignificant fees? There's an easy answer to this one, it isn't! Historical data has proven that 90% of mutual funds underperform the index after fees, so why on earth are so many people paying to earn less money than a non-expert who just buys something simple that tracks the whole index?
As an example I have taken some Canadian funds from some analysts you may know from BNN (Eric Nuttall, Bruce Campbell and Peter Imhof). This is not a knock on them by any means, the reason I choose them is because I respect their opinions and success rates. The point is to prove that even some of the best fund managers we have, even using riskier assets and active management, cannot consistently outperform the index after such high fees.
Over the past 5 years only one of these five funds slightly outperformed the TSX return of 22.3%. The TSX more than doubled the other four funds and the two Sprott ones actually had negative returns. This is through a bullish stock market run where even a beginner with no knowledge of anything could have chosen a few stocks at random and likely done very well. These returns can vary greatly over time and economic cycles of course. The Sprott Energy Fund is up over 60% in the past year while the AGF Small Cap Fund fell just under 50% during 2008 and then rose just under 50% the next year as the recent recessions effects drove markets. Peaks and valleys aside over the long haul you're getting ripped off. You may think you have a great fund, and maybe you do, but the simple fact is most of you do not have anything special in your funds and are missing out on a lot of potential money. You're wasting away your future nest egg with fees. There are many calculations done using different variables and scenarios, but a number that often comes up is that if you are putting your money in mutual funds the fees after effects of compounding can end up eating away half of your savings over the long run. Look at it in dollar terms: $250,000 instead of $500,000 for retirement, or maybe $1 million instead of $2 million. It really doesn't matter the total dollar value, the point is that if you think half of your future savings aren't worth a little bit of time and effort then that's your choice, but I at least want you to be informed of what you are missing out on.
Day Trade Canada