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Mutual Funds Are Good For Mutual Funds

Posted By Jim On 06/27/2006 @ 7:32 pm In Investing | 17 Comments

The latest Kiyosaki column on Yahoo Finance is about how mutual funds are a bad deal [3] because the fees are just downright nasty. The bulk of the article is an excerpt from an interview with John Bogle, founder of the Vanguard Group, on Frontline where he reveals that mutual funds are a raw deal. Usually when I read a Kiyosaki piece (or any “expert advice”), I’m looking to rip it to shreds because that’s the way you should approach all “expert advice” until you have enough personal trust in that writer to take the quotes off. In this case, Kiyosaki is spot on, traditional mutual funds are a rip-off and Bogle gives him good ammunition as to why.

Essentially, if you get an 8% return for 65 years and put in a mere $1,000 at the start, it will be worth $140,000 at the end. Now take away 2.5%, typical management fee for a mutual fund, every year and you go from $140,000 at the end of the year to a mere $30,000 – somewhere in that mathematical chicanery 80% of the difference is lost to the financial system. Skip to the end if you want to find out where it went. So you put up 100% of the capital, assumed 100% of the risk, and earned a little over 21% of the potential return.

Kiyosaki does make some good additional points… specifically “The next time you hear a financial expert recommend that you ‘invest for the long term in mutual funds,’ take a moment to ask them to explain how their fees work over the long run.” You should always be asking how the fees work whenever you talk to any professional, financial or otherwise, but it’s especially poignant to hear how someone will profit from your investments (because they will!).

The next good point, one you’ll hear often, is that you should invest in index funds if you’re going to go the fund route. Smaller fees mean more bang for your buck and when 80% of mutual funds typically won’t beat the market, it’s doubly better for you.

So where does the money go? Who makes it?
Actually no one in the financial system does (if the brokerage doesn’t invest the fee money in its own mutual fund), it’s as if you took that 2.5% out every year and spent it on a toy elsewhere. Actually, it’s more like if your neighbor took 2.5% out of your portfolio and spent it on his toy elsewhere.


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[3] mutual funds are a bad deal: http://finance.yahoo.com/columnist/article/richricher/6720

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