Recently I’ve been looking into ways to help my mum manage her finances. One investment option I looked into was managed fund (or mutual fund).
A managed fund is when you entrust your money with a qualified investment expert (this term is used loosely here) who takes your money to buy and sell securities, like shares and bonds. These experts generally aim to outperform a set benchmark like the S&P/ASX 200 over a period of time. In return, they charge you a fee for the services rendered.
A recent pod cast I listened to (which I’d highly recommend to you) shed some interesting insights into the U.S. mutual fund market:
- The average cost of owning a mutual fund is 3.17% per annum
- Over the past 10 years, 96% of all mutual funds didn’t beat the market on a post-fee basis
- Over a 20-year period, the average mutual fund investor would’ve made an annual post-fee return of 2.5%, when investing with the market would’ve earned you 9.3%
Reiterating the importance of compounding we last discussed in the super series, if two 25 year-olds earn the same return until they retire, the person paying no fees on his investment will be three times wealthier than the person paying 3.0% per annum in fees.
Moreover, fund managers often represent their historical performance so as to create the illusion of profitability. For instance, returns may be quoted on a pre-fee basis, making like-for-like comparison with other investments difficult. They may also tell you that last year they made a loss of 50% but this year investments were up 50% so the net return is zero. This isn’t true. You would now need to earn 100% return just to get your money back. Few more investing myths are busted here.
I’m not suggesting that you shouldn’t invest your money with a managed fund. I simply encourage you to learn the facts and understand that sometimes, the odds of picking an investment winner can be lower than, say, playing blackjack. In the case of the U.S. mutual funds, you are 50% less likely to pick a winner than saying “hit me” having already been dealt two face cards.
Well that was shitty. Every time I thought I’d come close to figuring out this money stuff and can finally go tell my mum where to put her money, something interesting come to light and mess up my plan.
The learning continues, what was that I hear about Warren Buffet saying you should put your money in index funds and move on…