Can A 1 1 2 Year Old Get A Uti Buying Mutual Funds – Be Fooled Or Be Angry

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Buying Mutual Funds – Be Fooled Or Be Angry

Over the years, practices that harm the investment results of mutual funds have become increasingly common. The only protection is to understand and act on this information. Modern mutual funds are characterized by what I call mismanagement fees. These are expenses that don’t have to happen, aren’t called fees, and aren’t deliberately misleading like the ones I’ve discussed elsewhere. But these are types of fees, nevertheless. These fees reduce the growth of your money, with no penalty to anyone but you. They are typical of the industry, and are really a kind of mismanagement of your money.

There are two types of fees that I will describe in this article. I will call the first “hyper-trading fee”, and it includes everything that is negative with this practice.

About hyper-trading fees: The first mutual fund ever was created in 1924. For fifty years they did things differently. From the second half of the 1920s through the 1970s, transactions by mutual fund managers simply weren’t done as frequently. The average stock was held for 6 years. That is, investment turnover was only about 7% per year. Then came the change. And this change was called the 401(k). From the 1980s and 1990s until today, the frequency of transactions has changed.

Today we have a turnover rate of 100%, which means the average length of time a fund manager holds a stock is one year or less. Some mutual funds even have a turnover rate of 200% or 300%. This means that on average they only hold onto their shares for four to six months. They no longer invest. They are no longer cautious, no longer do due diligence and no longer seek long-term results. They have become day traders.

Now, why should this matter to the investor? Well, there are several reasons. For every 100% of equity revenue each year, there is about 1% additional expense on top of already high management fees. An extra 1% spend, when applied to an industry that manages $10 trillion, is huge, $100 billion. When the numbers get so big, it’s beyond comprehension.

The size of the numbers tells you, firstly, why so much energy is put into making it look like they are looking after investors’ interests when they clearly aren’t, and secondly, it tells you that when there has a problem with the system, it adds up fast. Part of the expense of hyper-trading comes from taxes on holding stocks so short. Every transaction that results in a gain is taxed. So when transactions happen this quickly, the tax kicks in again and again, compared to holding the shares longer.

Here’s another one: a fund manager routinely moves hundreds of millions of dollars, and sometimes even billions of dollars, in and out of a stock. Because of this volume, they are essentially bidding on the stock price when buying. What could be worse than buying a stock for more than its value? This: Same factors, same results, only in reverse when they sell. The effect is therefore doubled. They depress the stock price when they sell. Due to their size, they may charge more; at the same time, they get a lower price when they sell.

This hyper trading is absolutely hurting the returns that investors get on their money.

John Bogle, who founded Vanguard, does a lot of research on the mutual fund industry. He did a study from 1980 to 2005. He found that over that time, the S&P 500 rose an average of 12% per year. Next, he looked at mutual fund investment results for that same period; over the same period, mutual funds grew by 10% per year, or 2% less. At first glance, 2% may not seem like much. But many little things add up to big things. It’s one of those great things. Banks get rich by understanding the difference of a few percent over the years. You can also. Multiply the results over this period and you will find that these mutual funds end up not earning an additional 2% per year for 25 years. This will earn the investor 44% less money over 25 years. Instead of earning $1,440,000, the investor only earns $1 million over the same period, a difference of $440,000.

The reason for this difference is fees: hyper-trading fees, direct brokerage fees, fund supermarket fees, payout fees; essentially, mismanagement fees. Without knowing it, it will be difficult to protect your money.

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