Reason #2 – 96% of Mutual Funds Don’t Match the Performance of the Market over 10 years
Every time we share this fact with investors they have the same exact reaction. It starts out being truly surprising. But their surprise soon leads to a very uncomfortable and perplexing feeling.
How you might ask?
That a great question….
Actually it is a $30 Billon dollar one!
The reason is more about why than how…
You see when most people seek professional advice they are usually looking for someone to “take the reins” and choose the best investments on their behalf. This usually is an excellent decision. However, one would think that they will successfully be guided into the best solutions possible for their investments….Right?
But this seldom is the case.
And that is where the why comes in to play.
You see the investment industry is a big business. And I mean BIG!!!! Just how big?
In Canada alone there are over $1.38 Trillion invested in mutual funds as of February 2017.
With the average mutual fund charging its clients 2.34% for the opportunity to invest with them. So, in order to understand just how influential this might be we should share with you the math.
$1,380,000,000,000 x 2.34% = $32,292,000,000
That’s right….over $32 Billion in fees!!!
And yet over 96% of all mutual funds will not match the performance of the market. The very thing that you would think you have trusted your mutual fund manager to do.
So how does this exactly happen…?
The reason that mutual funds cannot match the performance of the market over time is based on two simple reasons:
The investment industry is one of very few where you actually get more for what you Don’t pay rather than what you do pay for….Go figure.
You see every percentage point that you pay in unnecessary fees reduces your overall return by that exact amount.
But you might say, okay 1% does not seem like that big of a deal…
What investors need to realize is that every 1% that you save in fees increases their investment portfolio by more than 30% over a 30 year period.
With the exact same return!!!
For example: If you have invested for the last 30 years and have $500,000 within your investment account, if you would have saved only 1% on your management fees you would have an additional $150,000 for a total of $650,000.
Imagine that…simply by saving 1% you add over $150,000 to your retirement nest egg.
By doing absolutely nothing else. Zero!
I sure don’t have to remind you just how difficult it is to save $150,000 either…
It always surprises me just how much financial advisors and mutual fund managers overstate their abilities. Every single actively mutual fund advisor lays claim to the exact same strategy… That they are able to “out smart” all of the other smart people in the industry. At the exact same time that they are trying to “out smart” them.
The 3 things that need to occur correctly in order to have speculation work in your favor as an investor.
1. What investment you are going to buy
2. What investment you are going to sell
3. When you are going to both buy and sell each investment.
Just the mere probability of getting all three decisions correct over long periods
of time is not even a reasonable expectation.
And yet the entire investment industry is built upon that very fact.
Now, one manager may be able to outpace markets for a short period of time, but the longer you invest, the higher the probabilities of failure with these speculative methods.
In comparison, by having your retirement savings invested into the market itself, say by either using index funds or exchange traded funds (ETF’s) you are assured to receive the performance of the overall market.
Yet very few pensions have access to these types of investments. Mainly because they simply are not as profitable for the pension provider. After all, they want to earn their fair share of that $30,000,000,000 in fees. So these pensions will continue to force you to choose mutual funds and money managers that speculate in return for a handsome fee.
So by transferring your Pension and RSP assets out hands of active money managers, you are 96% certain to achieve superior performance.
…Many Canadians would consider losing 30% of their retirement portfolio a very tragic event.
…And yet buy continuing to invest into these actively managed investments you are virtually assuring this very outcome.
Precedence Capital / Gravitas Securities Inc.
The views, opinions and positions expressed by the author and those providing comments on these blogs are theirs alone, and do not necessarily reflect the views, opinions or positions of Gravitas Securities Inc.
Figures sourced from the IFIC