I am going to let you in on a little secret. I like mutual funds! (WHOA!)
I know. Your mind is probably totally blown right now, especially if you have read my blog for any amount of time.
However, there are many people who dislike mutual funds. Perhaps the most vociferous “haters” are financial gurus like Robert Kiyosaki and John Bogle. But why the hate? Why are there so many people who dislike mutual funds? I have narrowed it down to three different reasons.
- Mutual Fund Fees
Robert Kiyosaki’s reasoning for disliking mutual funds is pretty easy to understand – he is a strong proponent of people starting their own small businesses and growing their fortunes that way. However, John Bogle’s reasoning is a little tougher to truly understand.
I have absolutely nothing against John Bogle. The man is a brilliant pioneer and a major American success story. For those of you who do not know who John Bogle is, he is the founder and retired Chief Executive Officer of The Vanguard Group.
Yes, you read that correctly. THE Vanguard Group. You know. The giant mutual fund company!
Why on earth would a pioneer of one of the world’s big three mutual fund companies (the other two being Fidelity and T Rowe Price) be such a hater of mutual funds?
The reason has to do with fees. The Vanguard Group was built on fighting against high mutual fund expense ratios. The mutual funds from the Vanguard family typically have microscopic expense ratios, thus do not cost nearly as much as many other mutual funds (which may have been around for longer).
A mutual fund investor can spend literally hundreds of thousands of dollars in mutual fund fees over a working lifetime! In fact, my projections show that I will pay nearly $1,200,000 in mutual fund fees over my working lifetime! That is a lot of money, but what makes that figure even sicker is that I did not even flinch as I typed it.
How could I be so blasé about spending over a million in mutual fund fees? Because I also project to have over $26,000,000 in retirement assets by age 70, and that is after the fees have been taken out.
If you want to make a lot of money with mutual funds, expect to spend a lot of money too. It is really no different than any other undertaking. Somebody has to pay the piper!
- Investment Performance
Mutual funds get a lot of crap for their investment performance. The media and mutual fund haters spend a lot of time whining about mutual funds not performing up to par. The funny thing is that while there are many mutual funds that under-perform, there are many that are killing it. Just like any other business, 20% do 80% of the productivity.
That is why it is important for mutual fund investors to keep an eye on their mutual fund performance and make decisions about once every year. Which mutual funds are performing well and get to keep your money? Which mutual funds are under-performing and have lost the privilege to use your money? Treat your mutual funds as if they were your employees of your company, because really that is what they are. What do you do with the tail-kickers? You give them raises and you give them more responsibilities. What do you do with the slackers? Give them the boot.
- Fear of the Unknown
Finally, many people fear mutual funds because they fear the unknown.
I have always equated the financial markets as being that well-known scene from the Wizard of Oz. Everyone is so scared of the oh so powerful Oz. They fear him. Until the dog pulls the curtain away and reveals that the Wizard of Oz is really just another person. That is the same thing with the financial markets. Everyone spends more time being fearful of the financial markets that they forget that it is just people.
Do not fear the financial markets. Get to know them. Pick up a book, or a check out a good webpage if that is more your style. Educate yourself on the personal finance world, and your wallet will praise you for it. Do not blindly follow another person’s advice or rhetoric without developing your own original thoughts (and yes that goes for me as well).