Thursday, May 05, 2005

DON'T MAKE A $2,400,000 MISTAKE!

I have written many times that an important key to stock market profits is to keep your expenses low. A frequent reader did not realize until today that I 'm "anti-mutual fund". How can this be?

I have written many times about studies showing mutual funds on average under-perform the market by at least the amount of their expense ratios. I have frequently written that if your fund makes 10% but keeps 1.5% of assets your return is reduced by 15%.

Fifteen percent is a huge drag on an account. During a life time of investing, we are talking about a $2,400,000 mistake.

To keep the math simple, lets say that rather than accumulating your investment dollars that you receive an inheritance of $100,000 when you are 20 years old. If you invest the lump sum in 15 stocks that return less than the average stock at only 10%, by the time you are 60, you will have 5.3 Million Dollars. If you invest the same amount in a fund that also performs at 10% and has a total drag of 1.5%, by the time you are 60 years old, you will have 2.9 Million Dollars.


Buy and hold is not the best strategy, however, it has a very high probability of beating the average returns made by mutual funds. With 15 stocks, about 95% of the selectivity risk is gone. In other words, 15 stocks will probably perform very much in line with the over-all market. One can use tax management techniques to enhance returns.

Notice that folks seldom even try to make the case for mutual funds. Sales representatives like to meet buyers one on one to make the pitch. If you disagree, feel free to sound off!