Be a Top 20% Invester by Avoiding Mutual Funds
Mutual funds continue to perform poorly. Overall, their track record is poor even compared to the Dow Jones index. About eight out of 10 have a lower return than its corresponding index. Although a very small percentage of them are rewarding, I’ve still haven’t met a well off person who made their money from mutual funds. The only people getting rich from them are those handling and selling the funds. Managers get paid no matter what. Many get paid an amount based on the sum of the total assets that are in the mutual fund itself.
Why are there so many funds in existence with such a lack of performance? Many fund managers take part in window dressing. This is where the manager will re-balance a portfolio to show they are holding the hottest securities from the last period. They do not have to make clear every stock they’re holding; just the top holdings. Most investors don’t understand how this system works and depend on the information from their money manager. Many money managers are compensated by directing clients to dangerous funds and investments. Furthermore, many financial planners extract commissions based totally on the amount of transactions their accounts have. This only gives them more incentive to be constantly trading in and out of securities, sometimes in direct conflict with the best interest of the client.
Another reason why it is so difficult to determine a good fund from an average to poor one is that even the best money bosses hit a rough patch. This explains why it is better to understand the process employed by the fund manager than to only know only about the recent performance. Most investors chase performance. They’re going online and looking up the performance of the past year or past quarter. This, most of the time, is highly misleading.
The funds which have performed best almost never perform as well going forward. This is because after a good run, the base assets have become over-priced. Valuations within each asset group will eventually revert back to the historical average, or their long-term valuation. As stated earlier, most mutual funds underperform. Most individual investors who actually buy them do worse. They chase the best performing fund and buy it at the pinnacle. After that, they sell after it loses its value, then buy another hot fund.
In addition, assets that had been performing badly are usually under-priced and make better investment sense. This is because of the fact that you can often get assets for a cost that’s far less that what they’re worth.
From a tax perspective, actively managed mutual funds are simply atrocious. Unless the mutual fund is exchange traded, there’s a tax debt each time the manager makes a gain when selling an underlying security. See your income tax consultant for more.
Index fund investing is the best bet for those that need exposure to the equity market and don’t have the desire to study the market. This disposes of the requirement for an active financial planner. Many money managers have a conflicting interests and stand to earn money at their customers’ cost. Being in index fund investor, you may do better than eight out of ten fund managers.
