When should you get out of your mutual fund
The Globe and Mail published an article titled “When to pull the plug on that mutual fund“ by Mary Gooderham Thursday, Feb. 09, 2012. The purpose of the article was to provide some suggestions regarding an exit strategy if your funds are underperforming. I did post a reply to that article with my comments on their statements and thought it might be useful to post it here as well.
The article quotes are italicized and my comments follow:
“reflect on your reasons for investing in the fund in the first place” – probably because someone suggested it was a good thing. How many people bought mutual funds last February just before the market peaked and the fund salesrep could show great returns?
“Working with a financial planner or adviser, it’s important to take time to understand everything from why you were attracted to the fund to where its performance is today” – most people spend about an hour with their financial planner in January or February and pick a fund to invest in. How much time is done in research?
“the psychology of sticking with a mutual fund means broadly looking at its performance over the long term” – most mutual funds don’t last 5 years because you can’t sell bad performance.
“In an environment where everything is down, you can’t expect your mutual fund to go up,” – no but perhaps I can expect the fund manager that is getting paid to make better decisions.
“Transparency and communications from the company are important” – What communication and how transparent is the fee structure, the bonus structure and the marketing budget to sell these products.
“Read the prospectus and open your statements to make sure you understand how your portfolio is performing ” – the average investor doesn’t even understand the prospectus because they trust the advice they are given. Most file their statements and never look at them.
“Canadians pay the highest mutual fund fees in the world, with an average management expense ratio (MER) of about 2.5 per cent.” – Yes they do but have they ever calculated what those fees cost? Go to www.getsmarteraboutmoney.ca and run the Mutual Fund Fee Calculator. Don’t be surprised if your jaw drops.
Bottom line, instead of buying the funds, why not look into the shares of these same fund companies or banks. Not only will you make almost as much or perhaps even much more on the dividends they pay out but you can own your shares with out fees attached and done right you have tremendous opportunity to capitalize on share appreciation. Look at the following BMO example.
BMO Investments Inc. – BMO mutual funds 85 funds (in this grouping as per Globefund.com)
Average return over 3 years 9% (High of 30% and low of -2.7%)
$10,000 invested then would be worth $13,000 today.
BMO shares over 3 years. Then $23 Now $58 Share appreciation of $35 (or 152%)
$10,000 invested then would be worth $26,363. Plus you received a dividend of 4.85% per year.
What investors should really do is learn how to look at things properly and, by getting an education, take control of their portfolios. Why pay someone else 2.5% or more each year only to find out you may have to exit your mutual fund because it’s down 20%!
Happy investing.
This entry was posted on Friday, February 10th, 2012 at 1:07 am and is filed under Investment Training, RSPs, Self Directed Investing, Tax Free Savings Account (TFSA), Traditional Investing, Wealth Management . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
