With so many people asking why I don’t recommend or buy mutual funds, I figured it was time to actually put pen to paper and answer this question once and for all so here goes!
- You don’t know what you own. Mutual funds are made up of dozens or hundreds or even thousands of different securities so how can you really know what your money is actually funding? There are tools that will show you what is in these things but the vast majority of people never look at them. I don’t know about you but when I go to the store, I like to spend my hard earned money on clothes I know I like and that will fit, not something from the mystery grab bag.
- They are crazy expensive. According to The Motley Fool the average expense ratio for mutual funds is 1.5%. That means that just for the “privilege” of owning that fund, they are going to charge your 1.5% for their services. But Taylor, 1.5% is a small price to pay for expert money managers who are going to outperform the general market for me… WRONG. Over 85% of mutual funds fail to beat the market. Oh and guess what? On top of that 1.5% fee you have the fee you are paying your “advisor” to provide you with good advice. At the end of the day, most people are paying around 3% a year to own a bunch of stuff that isn’t in their best interest.
- Rich people don’t buy them. For the majority of people, the whole point to invest money is to make more money. Logic would tell us that if we want to make more money, we need to follow the examples of people who have made a lot of money and you know what, those people don’t buy mutual funds. Warren Buffett (one of the greatest investors of all time) is a huge proponent of buying individual stocks and one of my favorite quotes of his is “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” It’s hard to be happy with something when you don’t know what it is.
If you have a 401k/403b plan at work then you don’t have many options to invest in besides mutual funds but if your advisor is recommending you buy them, then you need to find a new advisor. You know why so many advisors recommend mutual funds?
- They get paid! Anywhere from 1 to 6% every time they sell you one! and that’s on top of their annual fee to you of 1-2%! Talk about a nice pay day!
- They are lazy. Why should they spend their precious time researching stocks and bonds that actually suit you when they can talk you into buying a huge wide variety of some that may or may not be in your best interest?
- They just don’t know any better. I know what it is like coming into the financial planning industry through one of the big guys. They train their advisors to provide advice that is going to be in the best interest of their shareholders, not the actual investor. It’s unfortunate that many of these advisors don’t take the time to study how financial planning should be done instead of just learning how to be a salesman.
In the end remember to keep it super simple. If you don’t know what you’re buying, don’t buy it. If you don’t know what you’re paying, don’t pay it. If everyone else jumps off a bridge, you don’t have to. Be smart out there and if you want some more plain English truth about the finance industry, join our mailing list to the right!