A common method for people to invest their nest egg or savings is to invest in the markets through a fund manager. Particularly persons who are not invested in property. There is a lot written on this over the Internet so I won’t regurgitate what’s already out there other than to highlight some key points.
I will tell of my experience delving into mutual funds.
I had some savings I wanted to have work for me and I ended up going to no less
than 8 separate firms and financial planners. All of them tried selling me a
type of fund managed by their firm which either had fixed costs or commissions.
When we discussed the expected returns all of them made the exact 2 points. This
is a long-term strategy, typically 7 to 10 years investment is required and the
expected return will be the market index which in my case being in Australia is
the All Ordinaries. So therefore I could expected 9-11% growth typically year
on year.
Now this begs a question, if the fund managers are using the Index as their
benchmark, ie All Ordinaries, ASX300, S&P500 etc, then why don’t I just
invest directly into the Index. You will find that a fund manager is what’s
called active investing and as a result there are fees involved and the
commissions can be typically 1-2% a year. Now if the expected growth is 9-11%
p.a. the fees now will make it 7-9%.
But cant the fund beat the market? Yes they can, however over the long term its
shown that the fund managers except in a small percentage of cases don’t beat
the market and with their fees this will impact on your overall return and this
is essentially where a mutual fund loses out compared to an Index Fund. The other
issue is how will you know which fund will beat the market over your investment
period?
Warren Buffet, arguably the world’s best investor strongly advocates Index Funds over Mutual Funds and fund managers. There are many articles on this however here is one I found after a quick search:-https://www.fool.com/investing/2019/10/29/the-boring-but-best-way-to-start-investing-with-10.aspx
So if it makes sense to simply passively invest in the
market, how do we do that. An ETF (Exchange Traded Fund) that tracks the market
such as SPY for the S&P500 or VAS
for the ASX300. Trading in this one ETF is a diversified strategy, as in the case
of VAS for example which tracks the ASX300 it has holdings in the index meaning
the 300 different companies that comprise it. The other advantage and perhaps
the big advantage is the fees are extremely low in comparison to active funds. For
example VAS annual fee is 0.1% p.a. Now compare that to the 1-2% other funds
charge. On a $100 000 investment an index fund at 0.1% will attract $100 in
fees yet an active fund at 1-2% will take $1000 to $2000 from your investment.
While I’m not saying Mutual Funds aren’t a good choice in certain circumstances,
clearly however an Index Fund makes it the preferred and logical choice should
someone wish to invest their finances in the stock market.