The Feeling is Not Mutual

The Feeling is Not Mutual

685 260 Pauline Lloren

Demand for investments have grown substantially, however, it seems like the mutual funds are enjoying the greater portion of the profit surplus. Unfortunately, mutual funds don’t perform at the level they claim. Today, we are going to highlight the issues within the investment industry in general, and with mutual funds in particular.

Here are six things we don’t like about the mutual funds:

1) Watered-Down Returns

Imagine the perfect glass of lemonade: it has the ideal amount of sweetness and the precise hint of lemon. Now, add a gallon of water to the glass of lemonade. Do you still want to drink some? That, in a nutshell, is a mutual fund.

Mutual funds suffer from over-diversification. Regulations cap the money a mutual fund can invest in any one company. How this affects you: any positive growth in the upside of the market will occur at a very sluggish pace. There is not enough money invested in one stock, or even a few stocks, to fuel fast returns (profits).

Since positive growth occurs at a slow rate, you would expect losses to show up at a gradual pace as well, right? Wrong. As many banged-up retirement funds reveal, the large diversification of the fund does not protect you from harsh declines in the market.

The rule of the market is that downturns happen more dramatically than upswings. This implies you get slower upside growth and rapid downside losses.

2) Too many Choices

Mutual funds are a popular and appealing investment because they provide everyday investors the belief that their investments are protected with a diverse number of stocks in a single investment vehicle.

The challenge is choosing the right mutual fund combo to invest in. There are at least 15,000 mutual funds to choose from in North America, hundreds of which are mere duplicate others.

It makes for a confusing mix of choices for investors. We may think we like choices, but behavioural research reveals that people simply can’t handle so many options.

Furthermore, a new study, building on prior research, discovers that the more investment choices a person is given, the more likely he or she is to naïvely divide the money equally among the options, which can potentially reduce returns, with long-term consequences.

3) High Management Fees

It is no surprise that Globe and Mail has labelled mutual funds as the “black hole of Canadian investing”. According to work done by independent analysis firm Morningstar, we discover that our fund fees are among the highest in the world.

 

 

But what does come as a surprise to many, is the fact that managers charge high fees just to hold cash. These managers charge 2% or more to hold cash and do nothing. While it sounds small, this fee guarantees that mutual fund managers remain in the country’s top echelon of earners. Think about it for a minute: 2% of $250 million (a small mutual fund) is $5 million – fund managers are certainly not going hungry!

It doesn’t make any sense to charge investors when the funds are not in play. The next time a fund manager boasts about his/her 40% cash holdings, ask for a corresponding 40% reduction in fees — see how that works out.

4) Fund Managers Charge Fees Even When You Lose Money

In almost all businesses, you are not required to pay if a company does not perform. If anything, you receive a small discount to compensate. For instance, if your new microwave does not work, the store will get you a new one or refund your money.

In the investment world, however, if you lose 40% of your money, your investment advisor or funds manager still takes their 2.5%.

We have significant appreciation for companies who waive their fees when investors lose money – however, there are very few of them around.

 

5) They Want All Your Money

Investors with large portfolios always have the same question: Do I have enough money to retire. In almost all cases, not only do they have enough money to retire, but they may have more than enough to retire and enjoy the rest. Yet, they constantly worry, because the investment business keeps them anxious about market corrections, increasing interest rates, and inflation.

As a result, many investors continually plow money into their accounts, producing generous fees for the industry, when they could be out using their money to fund other opportunities that create a satisfying life. Some investors, of course, won’t have enough. But the industry is unquestionably skewed to try to take it all.

Taking into account the amount of investment fees in Canada, do you believe any advisor would recommend to an affluent client that her portfolio is more than sufficient to support a retirement of her choosing and to take $1-million out of her portfolio and donate it or give it to her children? We highly doubt it.

6) Bewildering Terminology

Do you know what your fund’s Calmar ratio is? What about the B-Share or C-Share? Financial professionals love to toss around elaborate jargon to astound existing and prospective clients. It helps them look like experts in the eyes of their customers. But, really, is all that complicated terminology really necessary?

Most investors just want to make money on their money. They could care less about ratios, alphas and the like. Is it easy to find an advisor who just tells their client: “Here is what you made, and here is what I made from you.”

Of course not. The reason this doesn’t happen is because sometimes clients will make less than their advisors – and, well, it’s just not in the industry’s interest to tell you that.

Now that we’ve discovered what’s behind the curtain, what can you do about it?

Well, you have a couple of options:

  1. Sit and Do Nothing – after reading this blog you can proceed to deleting the information and simply do nothing, continue with status quo. If you’re currently invested in mutual funds, you can let the industry continue to bill you fees that bleed your portfolio and complain about how your funds are performing.
  2. Do Something – start googling alternative investments and discover a world of opportunities. Pick the ones that peak your interest and risk tolerance levels. Get EDUCATED. Reach out to the experts. If Real Estate is the vehicle for you – then talk to us. Check your schedule, set a coffee date or take advantage of any of our CORE events that give you a chance to talk to our advisors and experts in the field of Real Estate Investing. Get in front of investments not readily available to the market that are secured, little to no fees, offering predictable results.