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)
If this is not possible, make arrangements with the landlord to sign a lease that allows you to break the lease within a certain number of days without repercussions if the apartment fails to meet your expectations.
The Way Millionaires Really Live (2)
This is why, even with all the money in the world, they still work hard to build their businesses and empire. This is because they are driven by passion for what they do and a sense of mission.
Would You Bet 10-Cents On A Game Of Golf? (3)
Hole 10 $51.20 Hole 11 $102.40 Hole 12 $204.80 Hole 13 $409.60 Hole 14 $819.20 Hole 15 $1,638 Hole 16 $3,276 Hole 17 $6,553 Hole 18 $13,107 As you can see on the 18th hole, the bet becomes a whopping $13,107!
Which Would You Rather Have - A Student Loan Or A Mortgage? (4)
There is a big difference. When I got the mortgage, it included the house. The house is guarantied, the job is isn't. When I got the student loan, it only came with a high interest rate.
Should You Use Studen Loans Or Your Retirement Money To Fund Your Child's Education? (5)
Your retirement plans are more important than your children's college funds. Your kids can get through college somehow, and you will probably find a way to help them. It is more important to plan for your retirement.
Student Loans 101 (6)
There are options for deferring interest payments until after graduation, but if you choose to defer these payments, the interest will be added to the balance of your loan, thereby increasing the total amount owed.
How To Launch A Career In Real Estate (7)
Taking Real Estate Classes The first step to becoming a real estate agent is to take the proper classes. Often, you can take classes at a local community college or other facility that provides continuing education classes.
Tips On Avoiding Common Mistakes Made With Student Loans (8)
So it was impeccable timing when the credit card solicitors hit me. Finance charges and interest rates, what's that? These concepts did not matter at the time to me.
Can You Get A Car Loan With No Credit And No Cosigner? (9)
Getting an auto loan can be very complicated for a number of reasons, two which are more common than others. The first reason, as noted above, is because of someone's credit history or very little credit in the past.
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)
Once you get going you will understand the many work-study and programs that are out there. Most of all it will depend upon your desire and your willingness to do so.
Is Non-Regulation Hampering A Property Market Recovery In Spain? (12)
Topics: Spanish property, Spanish property for sale, Costa Blanca Property, costa del Sol property Regulation and red-tape are normally the dirty words entrepreneurs blame as hindrances to the capitalist art of making good profit.
Are You Allowed To Trade In A Car If You're Upside Down On The Loan? (13)
This is a little more tricky to do because you have more debt that you need to pay off. Eliminating a large portion of your debt all depends on how much you are willing to sacrifice and how much you are willing to downsize the quality of your car.
If Your Car Is Totaled, And Your Insurance Won't Pay Your Loan, What Do You Do? (14)
When this unfortunate incident occurs, you must contact an insurance agent who will come out and assess the damage to your car and estimate the value that it was worth before the accident.
Do You Know What A Mortgage Actually Is? (15)
These types of mortgages have fixed interest rates that are the same at the beginning of the loan period and also at the end. Court helps people to learn about federal direct student loans.
Overcoming Business Loan And Commercial Mortgage Finance Problems (16)
Strategy Number Three for converting the declined commercial mortgage into an approved commercial real estate loan: As mentioned above, there are other commercial lending options available. The commercial borrower's mission (and it is not impossible at all) is to use a commercial real estate lender that will allow them to get much larger amounts of cash out of a commercial refinancing without restrictions on what they do with it.
Your First Introduction To Reverse Mortgages (17)
Reverse mortgages, once they are obtained, allow homeowners to receive cash from the amount of equity that builds up from the market value of the house. The federal government converts the built up equity into cash that the buyers can use to pay off the mortgage once they are retired and no longer work.
What's The Smartest Way To Lease A Car? (18)
At the end of the lease agreement and contract, the consumer returns the car to the dealership without any additional monthly payments. In general, there exist two types of leases that are available to customers who find this last option appealing.
Advice On Getting Auto Loans (19)
You should definitely estimate the amount of income you are making and also the amount of fees and expenditures that you are going to make every month. Organizing and creating a financial budget for yourself is the first thing that everyone must do and will greatly enhance the effectiveness of finding a car loan that is right for you.
How To Invest In Stocks (20)
While purchasing shares for long- term one should opt for the shares, which are well established since shares are even more risky than mutual funds. While asset management companies manage mutual funds, portfolio shares are to be managed by the retail investors themselves.
Newer Articles Highlighter:
What Does A Stockholder Do? (1)
In general, they provide less safety of principal and certainty of income than good bonds and lack (unless convertible) any chance of sharing in the fat earnings accruing to common stocks in outstandingly profitable years.
A Major Concern For Business Sellers - What Happens To My Employees (2)
If they are in possession of key knowledge about the company, products, industry, technology, etc., they will be valued and will have a solid job post sale. Dave Kauppi is president of Mid Market Capital, Inc.
How To Use A Living Trust (3)
They are two different things and should not be confused, one with the other. A living trust is a legal document that ensures that a person's property is dispersed according to his or her wishes upon death.
Do I Need A Bank Account? (4)
Some banks offer interest-bearing checking accounts, which allow you to earn money on your deposit. Some banks will require a minimum deposit in order to open the account, others will not.
How To Go And Flip That House (5)
The house flipper will buy a house that needs significant renovations or work, and then they will have the work done themselves and sell the house for more than they bought it in order to make their profit.
The Value Of Charts To A Company Explained (6)
Charts should be used more extensively by executives, especially those individuals who have difficulty struggling through statistical reports or who have insufficient time to read all the interpretive comments flowing across their desks each day.
Slowing Mortgage Market 'Could Impact On Loan Borrowers' (7)
The company was reacting to the latest figures from the Bank of England, released yesterday, which reveal that net lending to individuals last month stood at 11.2 billion pounds. While the figure is higher than August - and exceeds the previous six-month average - the growth rate remains unchanged suggesting a slowdown in the sector.
Motorcycle Insurance With Points (8)
Generally insurers categorise motoring convictions into four sections and a speeding endorsement would be seen as a minor conviction. Other such minor convictions can range from not ensuring good maintenance of your motorcycle - a CU30 endorsement would be incurred for using a vehicle with defective tyres, to gaining points for driving without wearing spectacles - a MS70 endorsement would be incurred for driving with uncorrected defective eyesight.
How Can I Lower My Home Owners Premiums? (9)
Shopping for insurance, reading and reviewing different types of policies is not something that most people want to do over the weekend. It can be tedious work, to be sure.
How To Choose A Bank (10)
Other issues that you may want to look into include such things as the availability of debit cards. These cards resemble credit cards but they act differently. Debit cards actually take the amount of the purchase out of your checking account.
Reality Millionaire: The New (Old) Game Of 9 Rounds Anyone Can Play And Everyone Can Win (11)
There's a discrepancy there for most people and it's easy to see why people who don't pay attention are loosing the money game big time. Without conscientiously managing your money, the discrepancy will get worse, not better.
Debt Management Users 'Taking Longer To Repay Debts' (12)
With monthly living costs of 1,078 pounds, those involved in debt management plans have on average 229 pounds of disposable income each month. "[A debt management plan] also provides debtors with the peace of mind that they can afford to keep up their mortgage payments and household bills as these debts take priority over their unsecured debt repayments," Ms Gill said.
Tips For Buying A Great Vacation Home (13)
You can also make money from the vacation home by renting it out to other parties when you aren't using it. Make sure you know what it is that you are buying when you look at vacation homes.
How To Get The Best Price When You Are Buying A Home (14)
Topics: buying a home Buying a home is a huge investment so you don't want to commit yourself to it without doing your homework. Since you will likely be financing the property you want to get the very best possible price for it.
Investing In Commercial Real Estate Or Land (15)
There are certain principles of commercial real-estate. The owner of the property, the agent of real estate and the developer follows the same principles. The agents of real estate that are used for commercial purposes help in giving the best features to a prospective buyer.
How Simple Is Buying Cyprus Property? (16)
This amount can be paid by bank transfer or credit card. If you intend paying by cash be sure to carry that amount with you. 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.
Consider Investing Real Estate (17)
It is necessary to consider other factors like road connectivity, and water supply to the property. Real estates that are in close proximity to shops, schools and other places of public importance need to be chosen.
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)
If you are amongst the adamant people who are going to own their own piece of heaven come hail, rain or shine make sure that you are well prepared before taking the plunge or you might have to watch your heaven turning in to a real life hell.
Creating Value With Your Time (20)
You will find that not all the things you do create the same amount of the value. There are some activities that create high value while some activities are low in value.