The great mutual fund trap

Investors tend to focus on returns and ignore the costs of investments. Investors do not understand how markets work and the difficulty to beat the market index consistently, even by a little bit. You cannot improve your returns by spending more time or money to pick funds or stocks. Paying annual management fees and other fees depletes your investment. Almost all actively managed funds fail to outperform the benchmark and most of them are tax inefficient. It makes no sense to buy regular mutual funds when you can buy index funds or ETFs that track the market index in which you want exposure. And if you don’t know which funds to place in a tax exempt or tax deferred account you’re mishandling your own investments. The book also discusses the irrelevance of analyst recommendations and investment newsletters with research to support that neither of them are viable methods to outperform the S&P 500.

It might seem like an ugly look at the industry but it’s what the insiders already know. You can’t win playing the game on their terms. The costs of implementing strategies, even promising ones are out of reach for non-professional investors. How many people do you know that can claim they got rich because of their mutual funds? Where are all the rich mutual fund investors? The companies make money selling you hope and false expertise. And if the expected long-term average annual return is 8% to 12% that mutual fund managers cannot consistently surpass, it almost seems foolish to risk money investing on anything unproven with them when you could simply go with an index fund. Better yet, find a less risky way to invest in yourself to generate a consistent return above the S&P 500. If you play the market as an average investor, it’s a sucker’s game… or you’re simply letting the industry steal from you.