“I don’t take risk, so I invest in a mutual fund,” said a friend with a smirk. He is not alone. I have known many friends who take pride in handing their hard-earned money to the Wall Street gang.
If you are one of the proud mutual fund investors, I am about to ruin your day because that mutual fund is robbing your retirement.
And like those gremlins, these mutual funds spawn their ugly, and equally destructive offspring to rob your retirement with different faces.
I never invested in a mutual fund, and I felt good about the decision when I read what John Bogle had to say about the industry.
“When I joined this business, it was a profession with elements of a business. Today the mutual fund industry is a business with elements of a profession, and too few elements at that.” — John Bogle, Founder of Vanguard funds
Most major conglomerates that are running these giant mutual funds are running a business. They are not acting as a trustee whose fiduciary duty is to look after the benefits of fund investors. Like any other business, Mutual fund industry also has fiduciary duty for their shareholders. As Mr. Bogle points out, now you’re faced with this no-man-can-serve-two-masters dilemma.
It is not serving consumers for the very simple reason, I call it “the relentless rules of humble arithmetic” after Justice [Louis] Brandeis. And that is, we still think 2 and 2 makes 4, or 2 minus 2 equals zero. But when we talk about the market, we’re talking about the market return, and that return is allocated between investors and managers. — John Bogle
My pal Jim Collins has written an entire article on this very subject. So, I recommend that you read his precise commentary on how these mutual funds are robbing your retirement. Average fee of 2% can deprive your stash to grow at substantially lower rate if we assume that the market returns 7% annually in the long run.
If you are a 25-year-old, you need to invest only $3, 134 in a Vanguard Index fund annually to become a millionaire at age 65 if your stash grows at a compound rate of 7% annually. Now, if you have a friend who has similar goal but decides to invest in a mutual fund, your friend will have to invest whopping $6,822 annually to hit the same goal. That’s more than twice as much as you invest in the long run.
If nothing else, this single revelation ought to make your cringe.
What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding cost. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it, too bad for us. — John Bogle
This is why I never buy any financial product that has investment tied to it as a low hanging fruit. For one, consider slew of commercials manipulating your mind to think that to secure financial well-being of your family you need to buy a whole life insurance policy. Who is paying for those commercials? Of course, you do Mr. consumer.
Most whole life insurance policies return just over 2% if you keep paying big premiums for over 20 years. If you consider inflation, you are paying for securing financial well-being of the agent who robs you every month. Think again. Mutual fund industry has spawn these gremlins with difference faces to deprive you from being financially independent.
You are better off getting a term life insurance quote with Suncorp to compare premiums and invest the difference in a Vanguard Index fund.
Too many cooks in the kitchen
Do you remember Legg Mason Value Trust fund? Bill Miller was the genius fund manager at the helm in 90’s. His fund had outperformed S & P 500 for 15 consecutive years. It’s the worst fund you can invest in now.
Do you remember Fidelity Megallan fund? Peter Lynch returned whopping 30% annually for almost 13 years from 1977 till 1990 when he retired. The fund had over $100 billion of assets back in 1992. Now, it is one of the worst performing funds you can invest in. And it has only $10 billion of assets.
As Mr. Bogle pointed out, fund managers last for 5 years on average. If you are investing for 40 or 50 years, you will end up dealing with the whims of over 10 managers for each mutual fund you invest in. Since funds get created based on the hot trends in the market, you may end up losing your nest egg if you blindly hand your money to a hot fund without paying attention on a regular basis.
I admit that — that means that 99.2 percent of what our financial system does is a casino, and 0.8 percent is classic capitalism, directing new investment to its highest and best and most profitable uses. — John Bogle
When you invest in a mutual fund, you are financing the Wall Street casino where these highly paid managers roll dice everyday with your money. In that sense, they are no different from our politicians in Washington. Have you noticed the hyper growth of the hedge funds betting on outcomes and predictions that only those with crystal ball can predict accurately? Have you ever thought that when you wake up and go through all the pain to make money so that you can invest and retire happily, your mutual fund manager is busy gambling your hard-earned money?
The only way not to allow your hard-earned money to be gambled every day is to wake up and get out of this ugly game. Instead, make a commitment to invest in an Index fund. That’s the surefire way to a happy retirement.
photo by iiawards