Why Investing In Mutual Funds Is A Losing Proposition
One of the most shocking things I hear is when I meet many intelligent retail investors who tell me that they continue to place their money in mutual funds. When it comes to long-term investing, mutual funds are the last place you'd want to invest.
Why? Several reasons including the fact that most mutual funds are basically index funds. This means that the mutual funds try and mimic an index, which is their benchmark.
The problem with mutual funds for long-term investing is that they tend to underperform the actual index. This means that you as an investor are paying someone for a worse performance than simply buying an exchange traded fund.
According to Martijn Cremers, of the University of Notre Dame, his research resulted in the fact that only 10% of mutual funds were actually active, with approximately 60% being essentially index funds. (Source: “Your ‘active’ fund might be more passive than you think”, Financial Post, April 3, 2013).
According to Cremers’ research, the problem with mutual funds that simply replicate an index is that these closet index funds under perform their benchmarks by about 1% per year.
For those interested in long-term investing, this time period we are currently living in offers a massive amount of choice for investors. No longer are investors left with only mutual funds. These days, there is a large amount of choice when it comes to exchange traded funds.
Results from investing $1,000 at the end of every year:
For those interested in long-term investing, every dollar counts. Paying an extra 2% per year for 10, 20, 30 years is a massive cost and completely unnecessary. No longer are investors forced into mutual funds due to lack of choice.
Are there some mutual funds that warrant attention for long-term investing? If an investor is interested in extremely esoteric and exotic investments, such as small companies in tiny nations, then perhaps mutual funds that specialize in such niche and illiquid products might be prudent for consideration.
But, for the vast majority of readers, you don't need to be invested in mutual funds for long-term investing success. What you need is to reduce your costs as much as possible and own stocks in sectors that have the highest probability of helping one create wealth.
So the question is, "do you still want to own mutual funds when you can buy an ETF and pocket the 2% difference for yourself?".
After 30 years, would you rather have $164,494 or $241,333?
Do you have the time and skill required to select the best ETFs for your portfolio?
Creating a portfolio with the optimal mix of ETFs is very difficult, that is the reason why we created the ETF Total Return Newsletter. We did all the hard work for you.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.