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Thoughts About Mutual Funds

April 22nd, 2009 at 03:00 am

Today I have two quotes that I want to share with you. The first is from Albert Einstein. It may even surprise you to find out that a lot of the things that I am doing in my own investment program today are based upon his theory of economics. We all know about his E = MC squared but very few people have heard a lesser known statement that he also is said to have made.

"Compound interest is the greatest mathematical discovery of all time."

As I continue to talk about various investment vehicles that can put our money into it will become clear to you that I am soured on certain ones. When I was younger and working as a financial planner my whole theory was based on the beauty of diversification offered by mutual funds. In every professional magazine that I read reference after reference was made about the wonders of mutual fund investing. We can put in as little as $50 a month and be invested across more than 100 companies. How can anyone go wrong with an investment like this? There is an evil side of mutual funds that few people talk about. Unfortunately I led people into these things like cattle to slaughter. What is this evil lurking in the mutual fund shadow world? It is the evil of management fees. I call them evil because they can single handily destroy our ability to create wealth! You may be wondering at this point what is so bad about the fees charged by mutual fund families. The industry average at this point is said to be about 1% which doesn't seem to be that high of a price to pay for the opportunity to have a true expert manage our money, right? Wrong! Over a twenty year time frame just a 1% management fee will reduce our total return by 17%. I don't know about you but I want to maximize my return as much as possible and 17% is kind of a hefty fee to pay. People think that if they can just get past the loads some fund families charge by going with no load mutual funds then they will be home free but this isn't true because there is no fund out there which does not come without management fees. I have already said that 1% is said to be the average but quite a few have fees of 3% or higher and most investors never take the time to see what they will really be paying. None of the above will apply to our portfolio if we find a manager who will guarantee that they can get us a return that is at least 3% greater than what we can do on our own but I wish you luck in finding a manager who will do so. The reason that they would never make such a guarantee is that they could never do such a thing. The second evil of mutual funds is found in the second quote that I would like to share with you:

"The surest way to accumulate wealth is to make sure that you never pay taxes on income your don't use."

John D. Rockefeller said this and it is something we all need to keep in mind as we select investments to put our money into. Most of us don't have a whole lot of money to put into our investment programs and to have what little we have eaten up by taxes and fees is ludicrous! I don't know if you realize it or not but every time a fund manager buys or sells a stock the capital gains are passed on to us and we get to pay taxes. If dividends are paid in our mutual fund we get a tax statement for Christmas. I have discovered a way to invest in stocks that takes advantage of both compounding and also minimizes both taxes and fees - a win win on every side.

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