Winning With Mutual Funds
Topics: Adam Khoo, Financial Freedom, Financial Planning, Personal Finance, Wealth Building
A mutual fund (called ‘unit trust’ in Asia) is an investment vehicle that pools money from many individual investors. A professional fund manager invests and manages these funds into stocks, bonds and other securities.
People usually invest in mutual funds because it is offers the advantage of broad diversification (it spreads your money over tens or hundreds of stocks to reduce risk) and professional management. However, do remember that as broad diversification reduces risks, it also reduces return.
First, here is the bad news. If you speak to most people who have invested in unit trusts in Asia (especially Singapore) or in mutual funds, most would report losing money or just earning measly returns of 2%-4%. In fact, in the year 2004, it was reported in the Straits Times that 559,000 Singaporeans lost $680 million by investing their CPF in these funds. By going to the largest unit trust distributor Asia, you can easily calculate that only 6% of unit trusts beat the S&P 500 over a ten-year period. What are the chances of you placing your bet on this 6%? Chances are you would have had lower returns that the index, while still having to pay those hefty sales charges and annual management fees.
How about the US mutual fund market? On average, less than 10% of mutual funds beat the S&P 500 index each year! What’s worse is that it is a different 10% each year. Less than 3% of mutual funds are able to beat the S&P 500 Index over a five to ten year period. So again, what are the chances of you beating the market through betting on the right fund? Only 3%! You have better odds at the Black Jack table. The worse thing is that the fund manager gets paid an annual management fee whether or not the fund makes money.
Why is it so difficult for most people to make money in mutual funds? There are four main reasons.
1) High Sales Charges & Management Fees
Most people buy mutual funds through banks and financial institutions at retail prices where there is a sales charge (front load) and high annual management fees (expense ratios).
In Asia, most banks & financial institutions sell unit trusts with a sales charge of 5%-6% and with annual fees of 1.5%-2%. It means that before you even begin, you are down 6.5%-8% on your investment and will be down another 1.5% every year. Your fund must outperform the S&P 500 by 6.5%-8% just to make it worth your while! Again, less than 10% of funds worldwide can achieve this every year and less than 3% can achieve this over five years.
2) Buying the Hottest Performing Funds
Most people choose funds based on high short-term returns. These are the funds that are normally pushed and advertised by financial retailers. They feature impressive and enticing returns like ‘This fund was up +65% in the last six months’.
The fact is that the best short-term performing funds tend to also be big losers in the subsequent years and long term. Why? Because these funds tend to be invested in hot stocks or hot sectors where the stocks have been rising rapidly and fund managers buy, riding on the momentum. That is why they post very spectacular returns. However, strong buying activity tend to push these stocks to be overvalued and sure enough, the stocks will come crashing down in the next few years. Mutual funds that consistently beat the S&P 500 tend to be invested in non-hot sectors and do not post spectacular short-term returns.
3) Limited Selection of Unit Trusts Locally
If you are in Asia, then you are normally exposed to only a limited number of unit trusts. A check with fundsupermart.com (the largest Asian unit trust distributor) shows that there are just about 300 funds available here compared to over 8,000 funds in the US market.
When I made a search on the Top Performing Fund sold locally (year 2005), I was presented with ‘Fidelity America USD’ with a 10-year annualized return of 11.27%. (Recall that the S&P 500 returned 12.08% a year). So, even the top-performing fund couldn’t beat the S&P 500 after deducting expenses & fees!!
4) Lack of Research Knowledge, Data & Tools
The single most important reason why investors lose money in mutual funds
is because they don’t have the knowledge or necessary information to search for the top 3% of consistent performing funds at the lowest costs. Investors tend to buy on the advice of their bank managers, facts from the fund fact sheet or prospectus which does not provide enough information to select the right fund.
Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE bonus report ‘Get Out Of The Rat Race Now’ at www.SecretsOfSelf-MadeMillionaires.com
Previous Articles Highlighter:
Tips For Searching For An Apartment Online (1)
Eric Bramlett is the broker & co-owner of One Source Realty in Austin, Texas. Eric currently manages his Austin apartment Guide, his Austin leasing agent website, & his Austin apartment Guide.
The Way Millionaires Really Live (2)
If he were alive today, Sam Walton (1918-1992), founder of Wal-Mart would be the richest man in the world with an estimated net worth of $90 billion. If you take a look at Forbes list of the ten richest people in the world, five of them are the Waltons who inherited their money from Sam.
Would You Bet 10-Cents On A Game Of Golf? (3)
Let's say we played a game of golf and we made a friendly bet of 10-cent on the first hole, with the bet doubling on each hole. Would you take on this bet?
Which Would You Rather Have - A Student Loan Or A Mortgage? (4)
I have also owned a student loan. There is a big difference. When I got the mortgage, it included the house. The house is guarantied, the job is isn't.
Should You Use Studen Loans Or Your Retirement Money To Fund Your Child's Education? (5)
Topics: debt consolidation, credit repair, loans Are we really in deep trouble if we do not have a college fund set up for our children when they are already to head off for college?
Student Loans 101 (6)
If you have a federal loan, the government may pay the interest whild you are in school. With other types of loans, you are responsible for paying the interest while you are enrolled in school.
How To Launch A Career In Real Estate (7)
Therefore, you will need to be prepared to continue taking real estate classes even after you have successfully launched your career. By taking these continuing education classes, you will also stay up to date in the latest changes in the field.
Tips On Avoiding Common Mistakes Made With Student Loans (8)
At interest rates of 15 to 18 percent, you will be paying off this credit debt into your 30s or 40s. The way you handle your debt will follow you for many years.
Can You Get A Car Loan With No Credit And No Cosigner? (9)
If you select a much more reasonably priced car that does not cost so much, then you will have a greater chance of qualifying for the type of loan that you need.
Tips For Selecting A Great Real Estate Contractor (10)
- How happy were you with your real estate when the job was completed? - Did you feel as if the contractor listened to you when you ran into a problem?
How To Pay For School If You Don't Have Rich Parents (11)
For one year of full time (a total of 1,700 hours) paid service, you are paid $4,725. And you can do this for two years of earnings for $9,450.
Is Non-Regulation Hampering A Property Market Recovery In Spain? (12)
Co-operation between agents. Education standards. All these issues build confidence in the buyers mind and help agents effectively act for their employer whether it is a buyer or seller.
Are You Allowed To Trade In A Car If You're Upside Down On The Loan? (13)
This type of situation causes people to become upside down on their car loans and cause them some financial burdens. Several people as if it is possible to still trade in your car even when you are upside down on your car loan.
If Your Car Is Totaled, And Your Insurance Won't Pay Your Loan, What Do You Do? (14)
You must be strong and stand your ground when it comes to dealing with insurance companies. Court helps people to learn about federal stafford student loans. You can read more of his work by visiting: whalehookloans.com.
Do You Know What A Mortgage Actually Is? (15)
Mortgages have become very difficult to maintain and regulate, but the simplest definition is the money that is borrowed to purchase a house. The mortgage is paid off through monthly payments throughout the course of the next ten, twenty, or even thirty years.
Overcoming Business Loan And Commercial Mortgage Finance Problems (16)
Strategy Number One for converting the disapproved business loan into an approved commercial mortgage loan: For most business owners, there are reasonable commercial loan options beyond traditional commercial lenders. There are action-oriented non-traditional commercial lenders that will offer commercial mortgage loans for most special purpose commercial property situations.
What's The Smartest Way To Lease A Car? (17)
The ability to purchase a car has become somewhat more complicated in today's society because of all the taxes, regulations, and fees that you must also take care of throughout the process.
Advice On Getting Auto Loans (18)
Talk with the different dealerships about what kinds of loans are available and always read the fine print of the separate contracts. Court helps people to learn about student loans.
How To Invest In Stocks (19)
But how does a brokerage account work? There is a simple legal agreement between an investor and a licensed broker. Through this account the investor can make investments in securities as well as place orders through the firm.
Strategies To Effective Money Management (20)
So many people financially mismanage their businesses into bankruptcy because they mismanage their own finances. Don't be one of them! Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26.
Newer Articles Highlighter:
What Does A Stockholder Do? (1)
As part owner of a business, the common stockholder shares in the corporate fortune. In good times he gets dividends; in bad times, headaches. And his security, the common stock certificate, may fluctuate widely in market value in reflection of the various changes in corporate welfare.
A Major Concern For Business Sellers - What Happens To My Employees (2)
MMC is an M&A advisory firm focused on middle market strategic business sellers. Dave a licensed business broker and a member of IBBA and the MBBI. Contact (630)325-0123 davekauppi@midmarkcap.com or www.midmarkcap.com
How To Use A Living Trust (3)
If you fail to do this, the living trust is void and the state controls the distribution of your property. If minor children are involved, the state will decide who raises them.
Do I Need A Bank Account? (4)
You want to visit the online area and read their policies carefully. Of course, in order to get the most out of an online bank you will need an internet connection and computer.
How To Go And Flip That House (5)
Your contractor will be able to give you an estimate on how much your repairs and renovations will cost. Add an additional 3-5% on top of this estimate as many times projects run over budget as just a simple fact of life.
The Value Of Charts To A Company Explained (6)
For any company, the introduction of charts will make life easier. Revealed: The Surefire Way To Make Unreal Profits Using A Secret Formula For The Stock Market Click here for FREE online ebook!
Slowing Mortgage Market 'Could Impact On Loan Borrowers' (7)
I fear we will start to see rising arrears and repossessions," Ms Cuming continued. She concluded by reassuring consumers that eventually the market will regain stability and normality will return, but warned that in the meantime borrowing is likely to become more expensive and lessons will have to be learned about the risks involved in sub-prime lending.
Motorcycle Insurance With Points (8)
This type of driving disqualification would also have an impact on your bike insurance premium. In summary, more than two million motorists' driving licences will be endorsed with penalty points over the next twelve months.
How Can I Lower My Home Owners Premiums? (9)
Some of these deals can save you a lot of money over time. A second way to reduce your premiums is to increase your deductible. You should understand that your premiums are directly related to the level of risk that the insurer is taking.
How To Choose A Bank (10)
Banks like to work with long time customers and they will usually work harder with their own customers than they would with someone who just walked off the street. If you are planning to buy a home or car, try to deal with the bank that can finance that future loan.
Reality Millionaire: The New (Old) Game Of 9 Rounds Anyone Can Play And Everyone Can Win (11)
As an adult, there is no reason someone can't go to a local library and tap into the wealth of information available and teach himself. Once you commit to getting started, begin with rounds one and two below: 1.
Debt Management Users 'Taking Longer To Repay Debts' (12)
According to the company, the average time taken by a person on an informal debt management plan to pay off any existing debt is 12 years and two months, with debt consolidation loans often used to attempt to make debts more manageable.
Tips For Buying A Great Vacation Home (13)
While you definitely want the scenery from your vacation home to be lovely, you need to pay attention to the details of the vacation home. Take the time to ask why it is for sale in the first place as it can affect your decision to buy it.
How To Get The Best Price When You Are Buying A Home (14)
Money generally talks though so taking the time to get your loan pre-approved means the seller will be more likely to accept your offer. This is better than waiting for a higher offer but not knowing if the person will be approved or not.
Investing In Commercial Real Estate Or Land (15)
During the last decade there has been a lot of people who has been investing in it or land that are considered commercial. People are generating huge income out of these commercial real estates.
How Simple Is Buying Cyprus Property? (16)
Most sellers will not refund your reservation deposit, so you need to be absolutely sure of the property before you put any money down to reserve a property. The sale price is usually fixed at the same time that the reservation deposit is paid.
Consider Investing Real Estate (17)
There are several things to be considered when one takes a decision of investing in real estate/land. The first and most important thing one needs to consider while investing is the affordability factor.
What You Need To Know About Buying A Vacation Villa (18)
It is a good idea to have a legal adviser look it over for you as well before you sign it. Investing in a vacation villa offers you the chance to stop throwing your money away when you travel to your favorite destination.
Tips For Before You Enter The Property Market (19)
At the end of the day the house you choose and the neighborhood you live in should make you feel good about your decision, without any regrets. Once you are in your new home, make sure you enjoy it.
Creating Value With Your Time (20)
There are some activities that create high value while some activities are low in value. I In fact, I have discovered that for most average income earners, they only spend 20% of their workday doing truly high value creation activities while they spend 80% of their time on low value activities like checking email, attending unproductive meetings, chit chatting, complaining, waiting, finding lost item, stuff that does not generate profits or help clients meet their goals.