is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns. Many people believe that mutual funds are simply the best way to invest for the long term. That's what all the advertisements say, right? They are diversified, relatively safe, and have professional management. For some people, investing in mutual funds makes a lot of sense. People who should invest in mutual funds know that the stock market is a great way to create lasting wealth, but they don't want to make the effort to learn to invest correctly. These people are not "too dumb", or "don't have time", or whatever excuse they make. There is nothing wrong with someone like this, they just make it a lot more difficult to create wealth for themselves. Investing is a continual learning process. There is no magic formula or special degree required to be a great investor. The only requirement is desire. Anyone can have that. For those who don't want to make the effort to understand how the market works, hand your money to a pro. They will charge you outrageous fees, but at least you might be able to sleep at night.

Fees

The main reason you want to avoid mutual funds, if you choose to make the effort, is fees. "Management fees" and "loads" will rob you of potential returns. Here's how:

Without Mutual Funds

Mary buys 100 shares of XYZ company. She pays her broker $10 to execute the trade. The shares were at $10 per share when she bought the company. Her total investment was $1000. She owns the stock for 5 years and it goes to $50 per share. Her investment is now worth $5000 and she has a profit of $4000. Mary decides to sell her shares. She pays her broker another $10 for the trade.

Total Costs $20. Total account value after 5 years $4980.

With Mutual Funds

Joe buys shares of a mutual fund at $10 per share. He pays $10 to execute the trade. The mutual fund management fee is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns. O

re not "too dumb", or "don't have time", or whatever excuse they make. There is nothing wrong with someone like this, they just make it a lot more difficult to create wealth for themselves. Investing is a continual learning process. There is no magic formula or special degree required to be a great investor. The only requirement is desire. Anyone can have that. For those who don't want to make the effort to understand how the market works, hand your money to a pro. They will charge you outrageous fees, but at least you might be able to sleep at night.

Fees

The main reason you want to avoid mutual funds, if you choose to make the effort, is fees. "Management fees" and "loads" will rob you of potential returns. Here's how:

Without Mutual Funds

Mary buys 100 shares of XYZ company. She pays her broker $10 to execute the trade. The shares were at $10 per share when she bought the company. Her total investment was $1000. She owns the stock for 5 years and it goes to $50 per share. Her investment is now worth $5000 and she has a profit of $4000. Mary decides to sell her shares. She pays her broker another $10 for the trade.

Total Costs $20. Total account value after 5 years $4980.

With Mutual Funds

Joe buys shares of a mutual fund at $10 per share. He pays $10 to execute the trade. The mutual fund management fee is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns.

. They will charge you outrageous fees, but at least you might be able to sleep at night.

Fees

The main reason you want to avoid mutual funds, if you choose to make the effort, is fees. "Management fees" and "loads" will rob you of potential returns. Here's how:

Without Mutual Funds

Mary buys 100 shares of XYZ company. She pays her broker $10 to execute the trade. The shares were at $10 per share when she bought the company. Her total investment was $1000. She owns the stock for 5 years and it goes to $50 per share. Her investment is now worth $5000 and she has a profit of $4000. Mary decides to sell her shares. She pays her broker another $10 for the trade.

Total Costs $20. Total account value after 5 years $4980.

With Mutual Funds

Joe buys shares of a mutual fund at $10 per share. He pays $10 to execute the trade. The mutual fund management fee is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns.

ny. Her total investment was $1000. She owns the stock for 5 years and it goes to $50 per share. Her investment is now worth $5000 and she has a profit of $4000. Mary decides to sell her shares. She pays her broker another $10 for the trade.

Total Costs $20. Total account value after 5 years $4980.

With Mutual Funds

Joe buys shares of a mutual fund at $10 per share. He pays $10 to execute the trade. The mutual fund management fee is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns.

is 1.5% per year. At the end of the first year, the fund has gone from $10 to $20 per share. Joe pays $30 ($2000 new account value x 1.5% management fees) Not only has he paid a fee, but that $30 he paid has no opportunity to compound. Instead of being worth $2000, Joe's mutual fund is now worth $1970. If you use that math for the remaining 4 years, Joe's account value ends up at $4617. He paid $194.63 in fees and lost an additional $188.37 in potential returns. Oh yeah, he also paid another $10 to sell. Total Costs $214.63. Lost Returns $188.37. Total account value after 5 years $4607.

If you take that scenario and stretch it out to 10 years, the results are even more dramatic. Why? Because as Joe's account grows in value, the fund takes more and more in fees! The management fee percentage does not change. Management is taking the same size piece of a larger pie. How do you think they pay for all the advertising? Mary will only pay the fees to execute the trades.

Performance

Most mutual funds fail to beat the market in a given year. In fact, 75% of actively managed funds fail to beat the market in a given year. This means that 75% of the time, you would get better returns by investing in a passively managed index fund than investing in an actively managed mutual fund. As an individual investor, you can beat the market in most years. If you don't, at least you aren't paying huge fees to someone on top of not beating the market.

It's Not Their Fault

Why do mutual fund managers lag the market most years? Because of the nature of their job. They have to make most of the investment mistakes you aren't supposed to make. They have a compressed time frame for their fund to perform. They can advertise all they want, the bottom line is that performance attracts more money and more fees for the fund. If the fund manager was buying stocks when they are truly cheap and telling the fund holders to be patient, they would pull their money out. The fund would then lose money and the manager would lose his or her job.

Wall Street professionals in general have so many pressures around them that it is difficult to ever be a great performer. Is it any wonder that Warren Buffett, the greatest investor who ever lived is based in Omaha, Nebraska? Next time read about all