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That Mutual Fund is Robbing Your Retirement "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... Read more

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That Mutual Fund is Robbing Your Retirement

“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

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Comments (24)

[…] have a very serious and negative impact on your results. My pal Shilpan has a great post on this:  That Mutual Fund is Robbing Your Retirement Share this:FacebookTwitterGoogle +1RedditMoreDiggStumbleUponPinterestEmailPrintTumblrLinkedIn […]

[…] have a very serious and negative impact on your results. My pal Shilpan has a great post on this:  That Mutual Fund is Robbing Your Retirement Share this:FacebookTwitterGoogle +1RedditMoreDiggStumbleUponPinterestEmailPrintTumblrLinkedIn […]

Thanks for linking to my post, Shilpan.

But where I was only focused on 401k plans, you’ve taken the important step of pointing out the high fees of actively managed funds are corrosive all the time and no matter how and where you own them.

Well done!

I’f just linked to this post from three of my own.

Thank you, my friend. I hope that we can make difference one investor at a time. Since no one on CNBC is interested in interviewing Mr. Bogle, we need to do this noble work.

I think occasionally he is interviewed on CNBC and the like.

But the problem then is he is just one of many and most viewers will never see how different and important his ideas really are.

I am glad to know that he has been interviewed by CNBC. He is definitely not a friend of the fun(d) industry for sure.

[…] *In addition to underperforming Index Funds, actively managed funds cost more, and those costs have a very serious and negative impact on your results. My pal Shilpan has a great post on this:  That Mutual Fund is Robbing Your Retirement […]

You are SO right Shilpan, thanks for writing. Like you, I’m a disciple of Bogle when it comes to investing. He’s never feared to describe mutual fund managers for what they are: Overpriced charlatans.

I like that term, my friend! They are definitely overpriced and outright expensive.

Awesome post, a nice reminder of the way high expense mutual funds can eat away at returns!

Great post about mutual fund. Though it’s risky and expensive investing in mutual fund, you must have other sources of income so that your retirement will not be a problem.

This is a great post about mutual fund. I agree that there are risks but this can be negated if you have another source of income.

Absolutely! We used to have up to $80k with an advisor invested in mutual funds. The fees were obscene! Over 2.5% per year! And the performance of the fund wasn’t much better than the market. Over the next 10yrs we’ll save $24k in fees by switching to index funds.

That’s right! When you add fees to subpar performance, most funds return much less than an index fund.

Index Funds are definitely the way to go. I recommend reading Andrew Hallam’s book, The Millionaire Teacher, for sure. I really enjoyed his book and it was very influential in my thinking related to mutual funds and index funds.

Yes, I’ve read Andrew’s book and it is worth reading!

Good post and I agree that low cost, passive index fund (and ETFs) investing can be a great core for an investment portfolio. While it is true that many actively managed funds under perform, this is not all of them finding solid active funds to use as part of an overall portfolio takes work, knowledge, and the proper tools. So does monitoring these funds to decide when a fund needs to be replaced. I’ve found that over the years a combination of index funds and active funds has worked well for my clients.

Kudos to you Roger! As John Bogle has articulated well, problem with mutual fund industry is that funds are focused on industries and managers change hands, so it is very difficult for an average Joe to buy fund and hold it.

Yea most mutual funds are pretty bad. They’re run by a bunch of fund managers who can’t find jobs at hedge funds.

Nice post. While I agree that low cost index funds and ETFs are great core investment vehicles, I have employed select actively managed funds in client portfolios over the years with great success. As to your point about cash value life insurance being a questionable investment I couldn’t agree more. Life insurance is a key part of many financial plans, however the death benefit needed should be the driver not some questionable pitch about life insurance as an investment.

An eye-opening post Shilpan! What really gets my blood boiling is that there are index funds that doesn’t even need managing that charge over 2% ER!

The only reason such companies exist is because of how 401K is setup. If you don’t have a choice you will buy that crappy fund!

Excellent point, MC! Many of these funds survive because of investment from 401(k) plans force investors to choose one of these subpar funds.

[…] pal Shilpan also did well, finishing in the money twice. He […]

[…] That Mutual Fund is Robbing Your Retirement "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… Read more […]

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