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What you are about to read is probably a little different than what your financial advisor has been telling you:
A mutual fund is a collective investment that pools money from many investors and invests their in stocks, bonds and/or other securities. The fund manager trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors.
Many investment consumers, including myself are not happy with the fees that Fund Managers receive regardless of their performance in the market. The management fee for the fund is usually synonymous with the contractual investment advisory fee charged for the management of a fund's investments. However, this fee is always paid first which severely limits the incentive for the Fund Manager to do his best. For this reason I have removed all of my Mutual Funds and opted for the more secure Exchange Traded Funds or ETF's.
A friend of mine is the CEO of the largest investment club in North America and he recently made a trip to New York City to attend a large Mutual Fund company's year-end party. Everyone was dressed in formal attire, the champagne was flowing like a river and limousines complete with chauffeurs were coming and going at a dizzying pace. When my friend asked one of the drunk employees what all the celebrating was about he was told that the firm beat the market average that year with a negative five percent (-5%) return. What was the market average, he asked? The market average that year was minus seven percent (-7%).
Why should they care about your money. They get paid their fee whether they make money for you or not. That 2-5% management fee comes off the top every time.
It's one big, greedy business that involves the banks, financial planners, brokers and the media alike. It's called "Hyperactive Investing" and it's a trillion dollar industry.
I recommend that you take a closer look at Exchange Traded Funds. These funds follow the market average and will return a secure 10-12 percent return with no fees other than a low brokerage fee to buy them. Not very exciting but you will make money and be in control of your own investing.
Don't believe me? Read this:
A relatively new innovation, the exchange traded fund (ETF), is often formulated as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. An ETF usually tracks a stock index. Shares are issued or redeemed by institutional investors in large blocks (usually 50,000). Investors typically purchase shares in small quantities through brokers at a small premium or discount to the net asset value; this is how the institutional investor makes its profit. Because the institutional investors handle the majority of trades, ETFs are more efficient than traditional mutual funds and therefore tend to have lower expenses.
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