Here is a shocking truth… I don’t own any mutual funds in my regular brokerage accounts or Roth IRA anymore. In fact, I wouldn’t own any mutual funds if it were for the fact that my employer’s 401k only has mutual funds as investment options.
Now you might think that I’m crazy, but surprisingly I’m not. You see, mutual funds are too expensive of an option for me to own. You don’t think so, then let me point out the ways in which mutual funds are expensive.
Let’s say that you have 10 thousand dollars and you want to invest it all in the financial markets, here’s how mutual funds versus stocks compare:
It’s free to put the money in a mutual fund, but each year the mutual fund charges operating expenses of 1% on the balance held within the mutual fund. So if I bought 1 stock with the 10k, the transaction cost me around $10 and nothing at the end of the year. With a mutual fund it initially cost me $0, but $100 at the end of the year. Every year after the initial purchase my stock purchase cost me nil, but the mutual fund will cost me $100 each and every year that I own it! TELL ME THAT’S NOT EXPENSIVE! In some ways, buying individual stocks is a very frugal approach to investing.
Now let’s jump forward 10 years after investing 10k each and every year. Not considering stock appreciation, your balance would be 100k. At 100k, if you do nothing with the stock purchase it still cost you nothing per year, but the mutual fund is now charging you 1 thousand dollars a year!
Another financially hurtful thing with mutual funds is when the balance of the mutual fund is down, and year-end comes rolling around, the mutual fund company still takes their operating fees out of the balance. To me this is like rubbing salt into an open wound, or kicking a guy when he’s already down. The fund manager lost me money AND is still charging my for that loss. nice…
I remember in the past a few bloggers that were college professors reprimanded me in the comment sections for not investing in mutual funds, but quite frankly, I’ve done much better in my regular brokerage account than my 401k. So while I contribute less money to my regular brokerage account than my 401k, it has dramatically been rising in value and threatens to catchup to my 401k balance in 10 years or less. Obviously, I’m happy with my non-401k balances catching up to my 401k balance, but I have to wonder about how great of an investment mutual funds and 401k that only invest in mutual funds really are? One could advanced the idea (or is it really a fact) that the big winners with mutual funds and 401ks are the financial institution that provide such financial instruments.
As I was mentioned above that I was (gently) reprimanded, but perhaps people without experience shouldn’t do so without experimenting first? Just because you repeat things that other people write about in a book, in front of college class, doesn’t mean that you know it all! Or maybe I’m the exception to the rule and perhaps their route is best for the masses? After all, I did pay off my house in about 10 years, and that kind of make me an odd duck. Did I mention that by paying off my house early I was able to “not” pay 100k in interest to the banks. What was I thinking… lol.
Perhaps if you are already rich it doesn’t matter. Unfortunately I’m not so I have to go the frugal route and purchase my own individual stocks, etc.
So in conclusion, if you do the homework, stocks are a much more frugal and possible financially rewarding approach to investing. If you are new to the game, and don’t feel comfortable doing it yourself, then don’t. I personally have read tons of investment books and have an innate understanding of the stock market behavior and I understand the financial aspects that make a company “undervalued” so good, investment.