People usually invest in mutual funds because it is offers the advantage of broad diversification (it spreads your money over tens or hundreds of stocks to reduce risk) and professional management. However, do remember that as broad diversification reduces risks, it also reduces return.
First, here is the bad news. If you speak to most people who have invested in unit trusts in Asia (especially Singapore) or in mutual funds, most would report losing money or just earning measly returns of 2%-4%. In fact, in the year 2004, it was reported in the Straits Times that 559,000 Singaporeans lost $680 million by investing their CPF in these funds. By going to the largest unit trust distributor Asia, you can easily calculate that only 6% of unit trusts beat the S&P 500 over a ten-year period. What are the chances of you placing your bet on this 6%? Chances are you would have had lower returns that the index, while still having to pay those hefty sales charges and annual management fees.
How about the US mutual fund market? On average, less than 10% of mutual funds beat the S&P 500 index each year! What's worse is that it is a different 10% each year. Less than 3% of mutual funds are able to beat the S&P 500 Index over a five to ten year period. So again, what are the chances of you beating the market through betting on the right fund? Only 3%! You have better odds at the Black Jack table. The worse thing is that the fund manager gets paid an annual management fee whether or not the fund makes money.
Why is it so difficult for most people to make money in mutual funds? There are four main reasons.
1) High Sales Charges & Management Fees
Most people buy mutual funds through banks and financial institutions at retail prices where there is a sales charge (front load) and high annual management fees (expense ratios).
In Asia, most banks & financial institutions sell unit trusts with a sales charge of 5%-6% and with annual fees of 1.5%-2%. It means that before you even begin, you are down 6.5%-8% on your investment and will be down another 1.5% every year. Your fund must outperform the S&P 500 by 6.5%-8% just to make it worth your while! Again, less than 10% of funds worldwide can achieve this every year and less than 3% can achieve this over five years.
2) Buying the Hottest Performing Funds Most people choose funds based on high short-term returns. These are the funds that are normally pushed and advertised by financial retailers. They feature impressive and enticing returns like 'This fund was up +65% in the last six months'.
The fact is that the best short-term performing funds tend to also be big losers in the subsequent years and long term. Why? Because these funds tend to be invested in hot stocks or hot sectors where the stocks have been rising rapidly and fund managers buy, riding on the momentum. That is why they post very spectacular returns. However, strong buying activity tend to push these stocks to be overvalued and sure enough, the stocks will come crashing down in the next few years. Mutual funds that consistently beat the S&P 500 tend to be invested in non-hot sectors and do not post spectacular short-term returns.
3) Limited Selection of Unit Trusts Locally
If you are in Asia, then you are normally exposed to only a limited number of unit trusts. A check with fundsupermart.com (the largest Asian unit trust distributor) shows that there are just about 300 funds available here compared to over 8,000 funds in the US market.
When I made a search on the Top Performing Fund sold locally (year 2005), I was presented with 'Fidelity America USD' with a 10-year annualized return of 11.27%. (Recall that the S&P 500 returned 12.08% a year). So, even the top-performing fund couldn't beat the S&P 500 after deducting expenses & fees!!
4) Lack of Research Knowledge, Data & Tools
The single most important reason why investors lose money in mutual funds is because they don't have the knowledge or necessary information to search for the top 3% of consistent performing funds at the lowest costs. Investors tend to buy on the advice of their bank managers, facts from the fund fact sheet or prospectus which does not provide enough information to select the right fund.
First, just like in sports, you need to select the investment field you are going to be playing in. This can be decided by reading around. What many people are finding these days is that one of the best places to invest is in real estate, as while the market may fluctuate, it is still based on the solid foundation of real estate, which will always have value. For this reason, many look mostly at real estate mutual funds and REITs. Start by making a list of all the REITs, real estate mutual funds and investments you are considering purchasing. Next you need to do a little research on each of these investments. You could spend hours online looking up the companies and details behind each and every one of these, or go to one location where you may be able to find most of that research much more easily. REITBuyer.com is the only online brokerage firm that specializes in real estate mutual funds and REITs. In addition to being able to buy and sell the funds on their site, you will also be linked to a number of research tools and tips that can help you find out all you need to know about these investments before you buy. Now start putting in the REITs or real estate mutual funds you are interested in purchasing. Look at the statistics related to each of them. As you sort through, you will likely start to see some that are performing better than others and are projected to continue to do so. These are the funds that you should move to the next level of competition for your investment dollars. As the field becomes smaller and smaller, you should look at more and more of the details surrounding each of the possible REITs or real estate mutual funds. It won't take long before the statistics move a few of them to the head of the class. From here the decision is yours. Do you want to invest in more than one fund? Or do you want to spread your money around into more than one REIT or real estate mutual fund? Once you decide what you are going to do, you will be able to complete the transaction in the same place you have done all of your research. REITBuyer.com will allow you to make the purchase as well and then keep an eye on your portfolio in the months and years to come so you can continue to compare and contrast the performance of your funds and make sure they are working as hard for your money as you would like. This article was written by Earl E. Bird, III, spokesperson for the REITbuyer.com, a website designed to educate investors on REIT buying and investing in Real Estate Mutual Funds. Whether you are a savvy investment guru or a new investor looking for guidance, Reitbuyer.com has everything you need to be successful. Visit http://www.reitbuyer.com for more information.
Both Adam Khoo & Robert Shumake are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Adam Khoo has sinced written about articles on various topics from Recreation and Sports, Web Development and Computers and The Internet. Adam Khoo is an entrepreneur, best-selling author and a self-made millionaire by the age of 26. Discover his million dollar secrets and claim your FREE bonus report 'Get Out Of The Rat Race Now' at. Adam Khoo's top article generates over 90500 views. to your Favourites.
Robert Shumake has sinced written about articles on various topics from Best Mutual Funds, Property Investment and Best Mutual Funds. Robert Shumake's mission is to inform the public about mortgage fraud and real estate scams and to provide tips on how to avoid being a victim. ?Sometimes people will commit identity theft to obtain a housing loan, sell someone else's house or take over. Robert Shumake's top article generates over 6600 views. to your Favourites.