Any choice for investors?
I still remember when I first came out of school, investors who wanted to invest in the stock market but were unable to actively choose stocks by themselves would be “educated” to buy mutual funds. At least in that era, stock mutual funds is the only choice for those who want to invest in the stock market, but didn’t want to (or not be able to).
Because ETFs are not popular at that time, the United States was actually the same. Although index funds and ETFs were invented in the 1970s, they were not generally accepted and still far away. (Note: In 1975, John C. Bogle copied and tracked “The Standard & Poor’s 500 Index”, was the structure that created the world’s first index fund “First Index Investment Trust”, which was later renamed to Vanguard 500).
Investors get smarter
Twenty or thirty years ago, banks and goverment offices were the same. Especially in Taiwan, when there were less than a dozen of banks, local banks were almost all state owned bank, monopolizing the channels for financial management and deposits. Liked buying or not. It’s up to you, because you have no choice.
Even now, compared with many countries, Taiwan’s financial regulations are relatively closed and highly regulated. Based on the personal experience of a British immigrant to Taiwan, the BBC made a comment on Taiwan’s banks: “It seems to be stuck in the 1980s.” At that time, the people’s concept of financial management was very conservative, and it was generally believed that wealth management professionals knew better than most people in financial management or knowledge. If you still think so, then your financial managment score are dangerouse!
Due to the deregulation of banks, there are more diversified financial management channels, and more importantly, the development of technology, so that everyone can obtain the financial management information they want fairly and without time difference, and conduct more convenient and diversified investment channels; It turns out that mutual funds are not as good as claimed.
The younger generation is more open-minded, more able to accept other financial management methods, and dare to challenge the impossible. More importantly, there are more choices and performance comparison benchmarks, and anyone can invest in financial products from any country in the world to make more profits for themselves.
Performance is everything
Pandora’s box was gradually opened, and people began to discover that mutual funds were no longer the only ones, and they did not have the ability to turn stones into gold as claimed by wealth managers or agency dealers, because people had learned from many performance of mutual funds. In the past decades of performance, we have witnessed these unbearable facts.
A consistent long-term study by many institutions, including Bank of America (ticker: BAC), points out that only 25% of mual fund managers have higher investment performance than the broader market. According to the statistics of Morningstar Direct under Morningstar group (ticker: MORN) in 2021, the performance of active US stock funds lags behind the broader market by more than 85%. More than 79% of active mutual fund managers will be underperforming the S&P 500 and Dow in 2021, according to a new report from S&P Dow Jones Indices.
This proves one thing: no one will make jokes about the hard-earned money they make. Long-term brainwashing is still useful, especially for carefully designed propaganda. But once the beautiful myth that wealth management companies have woven for a long time and brainwashed is pierced by the performance facts, the facts can still win the final victory!
Fund manager’s interest is inconsistant to investors
The biggest problem with stock mutual funds is that the interests of fund managers and investors are not consistent. Fund management is a job for fund managers, but it is an investment of investors. When a fund manager is faced with having to choose one of the two, in terms of investment performance and job, no fund manager will choose the fund’s performance. This is human nature and reality.
Next time when you are tempted to invest your money in any stock fund, don’t forget to ask the whether the fund manager is betting all his net worth on this fund? If yes, fund manager is required to provide a public third-party verification certificate to prove it (this requirement is very reasonable); if not, please turn around and leave.
Buffett pointed out very early on that “the interests of fund managers and investors are not aligned” is the biggest problem for fund operators.
Holding cost is extramely
Have investors ever thought about: Most hedge funds are nonsense, the skill they have is bragging only. The management fee of a hedge fund is 2% of the fund, plus 20% of the annual performance return. In other words, even if the fund does not make money, they still get 2%. If the fund’s return was positive in that year, it would make more money, and another 20% of the positive return would be get.
Jason Zweig mentioned a series of statistics about mutual funds (also known as stock funds) in his book “The Little Book of Safe Money“:
- From 1991 to 2004, the average return of mutual fund managers was 7.4%, but in the end only 5.9% fell into the pockets of clients!
- John Berger pointed out that from 1984 to 2004, the average return of top stock mutual funds was 9.9%, but customers only received 6.6%!
- The University of Indiana research pointed out: From 1998 to 2001, the average return of stock mutual funds was 5.7%, and customers only have 1.0%!
Now everyone should be able to understand why the salary of fund managers is so good? Because this is all hard-earned money contributed by investors in mutual funds. Regardless of whether the fund’s performance makes money or loses money, the fund will charge a certain percentage of the annual custody fee every year.
Moreover, when investors buy and sell funds, they also have to bear a large amount of handling fees. In the entire supply chain, there are so many people relying on this for living. No wonder investors rarely hear any negative opinions about mutual funds in the media or wealth management industry, because they all rely on this industry chain for living.
Investors buy high and sell low
In his book “The Little Book of Safe Money“, Jason Zweig also highlighted:
- From 1973 to 2002, the average annual return of Nasdaq was 9.6%. However, from 1998 to 2000, investors poured into the overvalued market and injected funds of up to US$ 1.1 trillion. As a result, investors only earned an average of 4.3 % annualized average return.
- Between 1926 and 2002, investor returns were 1.5%, lower than market performance. The main reason is simple, because investors incline to buy high and sell low.
Why mention this data? Because investors, especially those who invest in stock mutual funds, do not go to deep research. Usually only check the current or last year’s performance of this fund. Almost everyone will buy the best-performing fund in the most recent year. But generally speaking, the performance of funds that performed well last year will be very different the next year, or the next few years.
A year later, when the fund investors saw that the fund did not perform well, they redeemed them and withdrew one after another. They rushed to buy funds that performed better the next year, and so on. It is conceivable that long-term investment is impossible. This is a typical band trade. It is impossible to make a lot of money with this investment method.
What investors should do is to check the longevity of this fund (it is recommended to be at least ten years, why? Please refer to my other related article “Whether a successful investor can be sustained?” Let’s check it out?” ) IRR, choose the fund you want to buy carefully, and make long-term investment. I suggest you refer to my other article “Investors should pay attention to the annualized rate of return (IRR), How to calculate?“ This is the most typical “myopia” phenomenon of investors.
Beware of survivor bias
But the stock fund industry will use some marketing tricks in their industry, but investors can hardly detect the trick, the greatest stock fund manager ever, Peter Lynch once mentioned this technique in his book. The mutual fund industry will merge funds that have not reached the desired goal of fundraising, and that have not performed well for many years, into the same company’s fund with better performance.
Especially the funds with better performance (the number of better-performed funds is small, generally speaking, it is the flagship fund in a fund company, that is, the best, and the star fund with better performance) is larger in fund size. Therefore, the performance of poorly sucked funds (of course will be very poor and the size of the fund is also small) will not have much impact on the performance of the better-performed fund.
This is also the main reason why in the market, each fund company usually has only one or two funds that sell well. Moreover, the fund industry will tell you that their fund performance is very good– of course, the bad ones are merged into the better-performing funds, leaving only one or two better funds. If the flagship fund that was used as a front door does not perform well, it will be split and merged into the company’s new rising star fund, and then a better rising star fund can be used for advertising. This is why investors only see that there are always excellent-performed funds everywhere — because poor-performed funds were always disappeared automatically.
Unspoken rules of the mutual fund industry
In my article of “The advantages of retail investors“, many unspoken industry rules of institutional investors (including mutual fund companies) are listed in detail. These rules inherently restrict fund companies from making big money:
- Discourage long-term investment
- Regulatory restrictions
- Forced to trade
- Not agile
- Less investment options
Almost each of the above limitations is a factor that prevents investment from being successful. After smart investors read these restrictions, do you still believe that investors who rely on this set of investment principles can make money for you?
Keep in mind of:
- The annual performance of last year or the year before last is not important. Please review the annualized rate of return for more than ten years; the longer the better-this principle is applicable for reviewing investors themselves, mutual funds, and your investment advisor.
- ETFs are truly no-brainer and effortless investment methods that can defeat inflation.
- Holding costs are very important. These cost are not small money at all, but big money. Investors who don’t pay attention to handling fees, management fees, and taxes (please refer to my post”The most two serious killers to investors inflation and interest rate“), it’s difficult to succeed in the long run.
- “Most investors should invest ETFs tracking broader market“
- “US issued ETFs tracking US market is your best bet“
- “Top 10 ETFs and important major US stock market index“
- “Disadvantages of ETF investment“
- “Whether a successful investor can be sustained?” Let’s check it out?
- “Investors should pay attention to the annualized rate of return (IRR), How to calculate?“
- “The advantages of retail investors“
- “The most two serious killers to investors inflation and interest rate“
- The content of this site is the author’s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.
- I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers’ direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.