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3 Big investing choices
Mutual funds the costly choice!
Mutual funds 1 of 3 big investment choices – mutual funds, the costly choice for small investors. These old personal finance products are past due. Although well established, these high cost funds deliver poor real returns. That poor performance makes them obsolete.
Money Choices Grow Wealth, lesson 13
First created by clever Dutch financiers, mutual funds were a brilliant idea in 1774. Their idea of pooling investment capital has stood the test of time! They began opening investments to the public. Although they were 1st, now mutual funds 1 of 3 big investment choices for consumers.
History’s most universal financial product
Mutual funds pool capital from many small unsophisticated investors. As a result small investors get professional management of their capital. Still, the control and investment decisions remain the financial professionals’ alone.
Financial dealers, banks and mutual fund companies all create mutual funds. Thus the public can choose from investments of every imaginable size and focus. Hence, mutual funds grew to become the most universal financial security ever created.
Funds can hold investment in stocks, bonds or a mix of both called combination or balanced funds. As a result of offering such broad products, marketers have a field day!
Their marketing fun includes naming, positioning and spinning the presentation of these products. As a consequence mutual funds offer blanket coverage of the market. Indeed, mutual funds serve every imaginable slice, dice and investing angle. There are funds for every small investor anywhere on Earth!
Many begin investing using mutual funds
Mutual funds are the starting investment for many people. Most mutual funds put most of the pooled money into large company investments. As a result, managers of large funds attract many investment proposals. They see deals and opportunities unavailable to small investors.
Mutual funds come in many sizes and flavors. Some offer broad and diversified investments. Others focus on a narrow market sector. In any event, an investor can focus on a country, industry, market or business sector. As an alternative, small investors can also buy broad coverage of the market or a sector. In fact the selection of investment opportunities includes any combination one can imagine. In short mutual funds offer an endless and bewildering array of thousands of choices.
The typical mutual fund customer has modest amounts of money to invest. Few have any but limited financial awareness and knowledge. Typical mutual funds are very easy to buy with small amounts of money. Investors can purchase a fund from almost any financial service firm. Some buy from a broker, financial advisor or banks that sell these products.
Mutual fund owners get to pay, pay, pay
There is good reason to say mutual funds the costly choice. Mutual fund sellers delight in the sight of a new buyer. The arrival of a buyer means more years of rich paydays for the sellers! That happens because mutual fund owners get to pay, pay and pay some more. Unfortunately they are obligated to cover all costs! In spite of too often poor performance, they must pay no matter how poorly the fund performs.
As a group, mutual fund costs are greater than the costs of any other common investment product. That puts mutual funds as number 1 on the wrong kind of list! Mutual fund costs are real and have a long history of getting hidden from small investors. Costs, expenses and fees get well obscured from investors.
Mutual funds like financial condominiums
Think of owning a mutual fund like owning a financial condominium. You can own a unit or several but you never own it all or actually control it. But you get to pay all the bills! The bills include all the operating costs, any mistakes and the management fees.
Cost include everything. Everything includes all transactions, maintenance, commissions, fees, slippage, margin, mistakes. And each year you get to pay all over again! You have no option of buying in and taking a ride collecting dividends. Likewise you can not just ride along without paying more. You must pay while the asset increases in value or in fact even when it decreases in value.
Yes, you get to pay if values increase or fall! . Any dividends received go into the fund, not your pocket. Mutual fund owners can actually end up paying for profit never seen or received. Should management show a profit selling an investment, payable taxes become an investor liability! You never actually get the gain but you get the tax pain. Any such taxes are your personal liability to your government!
Results of action taken by either management or other investors can cost you. In fact you pay costs triggered by the actions of others but see no benefit. Investors redeeming positions can force management to raise cash. Cash must be raised to pay them out. That selling to raise cash can trigger tax bills which you must pay! Not a good deal for you. This most egregious mutual fund ripoff is reason enough to avoid them.
World’s most expensive mutual fund fees
Canadian mutual funds rank among the highest fees charged to investors anywhere. Everywhere else mutual funds still rank among the most expensive investment products. As a result few financial service products come close to the costs charged by mutual funds. Know that some carry management costs over 3%. In fact the average exceeds 2½%!
Talk about mutual funds are the costly choice! As well those management fees include costs that get taken even as other costs get included the results! Even in a positive market, the net result for investors are most often poor real returns.
Significant real costs get obscured from the fund owners as a matter of routine. The costs and fees can consume all or often, most of any market gains. Fund losses or when the market value drops are 100% borne by owners. The investor pays all costs including all mistakes made by any party. All this while most funds actually under perform the market!
Most galling, even selling to leave a fund can have a high cost for investors. Deferred sales charges have devastated many accounts. Those charges are yet another cost mutual funds use to punish those selling and leaving the fund.
Costly mutual funds remain very popular
Why are mutual funds so popular? They are easy to find and buy. There is good reason mutual funds 1 of 3 big investment choices for consumers. But most consumers are unaware of the real costs they will pay.
It is all about sellers making the money. Everybody but the investor owner gets paid very well to sell and keep you in mutual funds. These products offer the salesperson “advisor” the highest fees. Any advisor selling you mutual funds is not working in your best interest.
Financial bliss for mutual fund sellers
Uninformed public buyers do not know better. And mutual fund companies are happy to keep things that way. Mutual fund annual reports are difficult to read and understand. They make important information obscure and challenging to extract.
It takes much knowledge to analyze mutual fund reports. Doing so also takes the determination of a bulldog to extract a full understanding. Few financial advisors have the ability to take a mutual fund annual report apart. That makes it impossible for them have a true and deep understanding of fund performance. It leaves them unable to give a full true explanation to investors.
None of that bothers the brokers or financial advisors selling mutual funds. They remain content to collect the recurring high commissions and annual fees. Without doubt, that works for them. But it is not in the best interest of most people. Those fees and costs eat investor returns. The mutual fund seller does very well, you, dear mutual fund investor, not so much!
Technology leaves mutual fund costs behind
Technology gives us an alternative. Mutual funds carry centuries of administrative baggage. That happened because they were created in an era of paper record keeping. It was a time of face to face meeting, people heavy administration and bureaucracy. As a result each added cost on more cost. Now new technology takes away cost for small investors.
Leaving the costs behind continues the advantages of mutual funds for small investors. Things change and one certain change of technology happened to investing. Although mutual funds 1 of 3 big investment choices, remains true. But technology opens many alternative doors.
For example, digital communications leave obsolete mutual fund management structures in their dust. Technology erases the need for costly outdated bureaucracy. Alternate financial products now outperform mutual funds by a huge cost difference.
For this reason small investors get comparable performance at a fraction of the cost. To bring these advantages to your portfolio, give Exchange Traded Funds (ETFs) a look. Check out the lesson, Change to Accelerate Investment Returns. ETFs are an excellent low-cost alternative to mutual funds.
That concludes the lesson, Mutual funds 1 of 3 Big Investment Choices. The biggest take away is that high costs make mutual funds obsolete. These old personal finance funds are past their due date. Investors should look elsewhere for better performance and lower costs.
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Money Choices Grow Wealth lesson links:
Introduction to Money Choices Grow Wealth Lesson 1
3 Stock market approaches Lesson 2
Income, value and growth investing Lesson 3
Aggressive trading chases profit Lesson 4
Momentum investing trading play Lesson 5
Speculation big returns for big risks! Lesson 6
3 Distinct investing approaches Lesson 7
Speculation complications trade risks for returns Lesson 8
Middle trader thinking differs Lesson 9
Investing trading and speculating differ Lesson 10
Speculation failures improve investing Lesson 11
6 Other investment choices Lesson 12
3 Big investing choices Lesson 13
Buying ETFs accelerates returns Lesson 14
Equities the 3rd choice Lesson 15
Next lesson 14:
Buying ETFs accelerates returns
Have a prosperous investor day!
Bryan
White Top Investor
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WhiteTopInvestor.com
About the Author Bryan Kelly
Bryan Kelly shares decades of experience to make stock market investing accessible to everyone. His knowledge guides investors to make money work for them and avoid mistakes seeking personal empowerment, independence, and retirement comfort. The About page tells the story of how a question from his daughter began White Top Investor.
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