Would you like to receive monster-sized checks, drive a different car for every day of the week and own multiple estates across the globe; all while underperforming the market?
I know…I know…sounds too good to be true, right?
But it isn’t. You see, a small fraternity called fund managers can actually afford to live this way. Best of all, you help fund their lavish lifestyle.
Doesn’t sound fair, does it?
Well, without your support it wouldn’t be possible. They live in the lap of luxury, raking in (your) money from (their underserved) fees.
It’s no secret; most mutual funds and hedge funds underperform the market. In fact, according to a study conducted by Motley Fool in 2013, only ten of ten thousand actively managed mutual funds were able to beat the S&P 500 consistently over the past decade.
Now, I’m no mathematician, but it seems like the odds of finding a top-notch money manager… is just as good as having a perfect March Madness bracket. OK, maybe it’s a little better, but I think you get the picture.
Year after year, these funds print money…well, not really…they just take yours.
Here’s what they’re all about:
First, everything is relative in this business. A good or bad year is determined by how a fund performs relative to its benchmark, in many cases, it’s the S&P 500 index. According to SPIVA (S&P Indices Versus Active Funds), in 2013, 56% of large-company funds and 68% of small-company funds failed to beat their benchmarks. Year after year, it’s the same old song and dance.
Now, a fund can have an “up” year; however, it’s all relative. For example, if the “market” is up 20% and the fund is up 10%, the fund is underperforming. However, they can always advertise their performance in a positive way.
On the other hand, if the “market” is down 10%… and the fund is down 8%, the fund is outperforming. Again, this can be twisted into being a positive.
What if the majority of funds do poorly?
Well in that case, they can compare themselves to their peers, not the benchmark. As you can see, everything can be spun into a positive. They are graded on a curve…unfortunately, the real-world doesn’t work that way.
Bottom line, if you simply bought a product that resembled the S&P 500 index, you’d beat the majority of mutual funds out there. I know, it sounds crazy, but it’s true. You’d think with all those advanced degrees in a room, an army of analysts at their disposal and countless hours of research, that these funds would have an edge.
I know it seems unbelievable but facts are facts!
But it gets worse.
The average mutual fund will charge you around 1.25% – 2.5% in fees, this covers the management fee, administrative costs, marketing and advertising fees. That’s right folks… next time you see your mutual fund featured in a TV commercial, make sure to brag to all your friends, because it was your money that helped pay for the spot.
Also, keep in mind that transaction costs from trading are not included in the “expense ratio.” Not only that, but some funds will even charge a loading fee (aka the f**k you fee). This fee rewards the stockbroker who recommended the mutual fund to you; after all, they have to get in on the piece of the action. Why would they recommend something to you if there wasn’t anything for them to gain?
Now, when you join a health club, you pay a membership, in return you have access to their equipment and the tools needed to get in shape. When you sign up for a mutual fund, you are charged a fee to pay the manager and their staff, in return, you’re promised nothing back.
In other words, your hard earned money goes towards feeding their lavish lifestyles. The game is simple, the more money invested in the fund, the more money they make in fees. Of course, this requires marketing and salesmanship to get the job done.
Nevertheless, everything is devised to sound sophisticated and necessary. I know, because I was once on their side. Working as a stockbroker, I learned first-hand that a lot of this business was simply founded on good ol’ fashioned sales and marketing. Believe me; it didn’t take long for me to cut ties with this dark side of the biz.
At the end of the day, the majority of these funds offer the sizzle but not the steak. Ironically, having your money invested in these funds give off the impression that you’re responsible and smart.
After all, you’re delegating duties to “professionals” who know their stuff. But let’s face it, we know this isn’t true. They underperform while nickel and diming you in fees.
So what gives?
The majority of investors are scared to take on the responsibility of taking financial matters into their own hands. If their money manger underperforms, they can use them as a scapegoat. However, if they take control… it’s all on them. Of course, this can be very intimidating at first.
But you know what?
No one is going to care more about your money than you. A money manager is going to get paid no matter what.Ultimately, their goal isn’t outperforming the market; it’s to stay level with their peers (other money managers). As long as they can add AUM (assets under management) and collect fees, they are doing their job…AKA well for themselves.
How About Hedge Funds?
Sadly, hedge funds are even bigger fee vacuums. In Sinon Lack’s book, The Hedge Fund Mirage, he offered some incredible statistics pertaining to hedge fund performance and fees. For example, from 1998 to 2010, hedge fund managers earned $370 billion in fees. However, their investors earned a whopping $70 billion in investment returns.
In the summer of 2013, Bloomberg Businessweek, wrote a piece titled: Hedge Funds Are for Suckers, debunking the myth that hedge fund market wizards consistently outperform the market. As mentioned earlier, this isn’t breaking news…it’s been well documented for years.
Advantages You Have:
1) Mutual funds are generally fully invested at all times; they are competing against their peers, not the market. On the other hand, you have no competition. With that said, you don’t have to be invested all the time.
Often times, being in cash, is the best market position for you to be in, but not for them since their business model is to invest your money so they can get paid. In addition, you can be more selective with your investment decisions.
2) Using options to generate better opportunities and success. The probability of a stock price rising is 50/50; however, with options you can structure positions that skew the odds more in your favor.
In addition, options are leveraged, meaning you can use less capital to achieve better returns. Not only that, structured option strategies allow you to define your risk and hedge core investment positions.
Best of all, you don’t need a specific market condition in order to invest with options. In fact, they can be used during periods of high or low volatility, bull and bear markets…as well as choppy and sideways markets.
Now, do you want to delegate your finances to funds, which underperform and hammer you with undeserved fees? Of course, it’s going to take some courage on your side to end this vicious cycle.
For years, I’ve helped investors take this monumental step, showing them methods and strategies that could potentially lead them to financial freedom. I understand that not everyone has the same time to devote to their investments.
That’s why I’ve created specific courses for investors who are strapped for time. I believe through the right investor education, you’ll gain enough confidence to take control of your financial future. That’s why I frequently send out emails to subscribers that highlight: trading opportunities, timely market analysis, free reports, video lessons and much more.
In the end, I’d like to maintain a lively and active community, where we all learn from each other. After all, these funds aren’t helping our cause.
Now, I’d love to hear your thoughts on how we can stop these fee thirsty funds and their shenanigans, in the comments section below.
Also, make sure to sign up to receive my mega-valuable emails about investing and the financial markets. In addition, I’ll send you my latest free report.