I gotta admit. I used own mutual funds and I kinda liked their performances before I realized how much more money (up to 20-25% higher) could have been made if my money was invested in one of ETFs that I currently own. I will never make that mistake ever again.
On December 4, 2000, John Bogle, the founder of my favorite ETF provider, Vanguard Group, was here in Toronto, stated that “Mutual fund investing is an expensive home to long-term investors. $1,000 invested 50 years ago in the S&P 500 would have grown to $514,000. However, with fees of 2.2%, financial intermediaries would have taken $321,000 of the sum leaving only $193,000 for the retiree” That is a 63% of the return that was stolen by your bank that manages your mutual funds.
Most of mutual funds charge Management Expense Ratio (MER) of 1.5-2.5% whereas ETFs that I own or I like to own charge 0.05-0.35%. Mutual fund MER is about 10 times higher than ETFs that I own. First year or two, you may not think 1 or 2 % would make difference however as John Bogle mentioned, within 20-50 years, it will make an enormous difference and you wouldn’t want to know the comparison if you invested your money into mutual funds all your life.
What your mutual fund provider wouldn’t tell you is how much they have deducted from your total return. For example your quarterly or yearly statement would say your investment value has gone up by $3,000 (3%) then your original investment value would have been increased by ($5,000) 5%. Your mutual fund provider would have made $2,000 out of your investment.
You may question “Wouldn’t the returns of mutual fund be higher than ETFs (index funds)?” My answer is maybe or maybe not. Historically, it has been very hard for any mutual fund provider to beat the market (indexes). Indexes typically perform better than your mutual funds.
Now you would know what to do. Stop wasting your hard earned money and do your own research and buy solid ETFs or stocks. A great portfolio is built upon the principles of minimizing MERs.
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