3 Ways Mutual Funds Legally Steal Your Money and How to Stop Them

Would you trust a complete stranger to babysit your children for the weekend?

Probably not.

Would you share your bank account information with some random person you met on the street?

Probably not.

Would you give your hard earned money to a complete stranger to invest for you?

Of course you would…

Wait … what?

You see, over 50 million Americans have their money invested in mutual funds. However, many of them don’t even know the name of their mutual fund manager.

But it gets worse…

The majority of these funds fleece their customers in fees … not only that, but they underperform the market.

Generally, funds are pitched to the investment public through a broker. Even if you never received a call from a broker … if you have a 401(K) plan, some salesperson convinced the company, you work at, to choose its family of funds.

Now, if you’re a salesperson and your boss gives you a list of products to pitch to the public, which one are going to choose?

Some might pick the funds that have performed relatively well. But far too many are going to select the funds that give them the largest payout in fees. After all, it’s the same amount of work for them, why not make the most money?

Your brokers’ goal is not always aligned with your best interest.

So the brokers’ goal for the most part is to fatten their pocket first. On June 1st, tastytrade.com covered this very topic. With that said, it was scary to see how much of an impact fees had to the investor.

These costs can be significant for the investor. For example, if you invested $100,000 into a front-fee fund paying 6% per year and with a 1% per year performance fee, after 17 years, you would have paid nearly $51,000 in fees and missed opportunity.

This is 50% of the original amount invested. Talk about a slow bleed from your account, right?

According to U.S News & World Report, there are over 50 million Americans who’ve invested over $3 TRILLION in 401(K) plans.

Now, the more I think about it … the more disgusted I am by these funds who choose to nickel and dime investors.

Here is a Chart that shows the average fees for different fund categories according to Morningstar:

Mutual Funds* Morningstar: http://www.morningstar.com/InvGlossary/expense_ratio.aspx

You might be thinking … but Josh, these funds are working hard … they’re really trying to make me money … don’t they deserve to earn a living?

Look, I’m all for someone getting paid … but only if it’s deserved. For the most part, these funds are making money off you … and only you!

The Majority Of Funds Out There Can’t Beat The Market

Mutual Funds2

According to SPIVA, over 85% of all domestic equity funds were unable to meet the performance of the market (over the last 3 years). If you selected small-cap funds … well, only 8% were able to meet their benchmark.

Well, what about hedge funds? They ought to be kicking some butt … right?

Think again…

Mutual Funds3

source: Bloomberg LP

The chart above highlights the performance of the S&P 500 (yellow) vs. the Credit Suisse Hedge Fund Index (blue) over the last five years. As you can see, hedge funds haven’t been knocking it out of the park either.

I’ve written about this topic in How to Underperform the Market and Get Paid Like a Rock Star.

Would you take your car to a mechanic that constantly makes your car perform worse than it did before you brought it in?

For whatever the reason, many investors are scared to take matters into their own hands. Either they don’t want the added responsibility or they’re scared to lose money.

Well, I’m here to tell you, that you can take matters into your own hands … and with the proper guidance; you might be surprised at the type of results you can get.

You see, I’ve been helping investors take that next step for nearly a decade now. And no … I’m not going to turn you into a “stock picker” like these fund managers who are constantly throwing darts at a board.

Instead, I want you to be strategic … by using less capital and leveraging your ideas. Not betting on if a stock will go up or down … but use probability to stack the odds in your favor.

Now, this might sound a little scary or overwhelming at first. But the reality is … no one is going to care more about your financial well being than you. If you think a fund manager is sitting up late at night … cooking up ways to grow your wealth … you’re sadly mistaken.

Remember, they make money being invested in the market … collecting fees left and right. Sometimes market conditions don’t make sense to be in the market … and cash is the best position to be in. However, the fund industry disagrees with that thought process.

That’s why the time is now to get pro-active about your investments. Take responsibility before things get out of hand. I’ll be here to help you out, through investor education, courses, market analysis, free reports and video lessons. My goal is to give you the power and tools to make it on your own as a self-directed investor.

What’s The Next Step You Can Take?

Passive vs. Active Investing:

Actively trading with options generally provides a higher percentage of monthly returns than just plain ol’ passive investing. If you want to passively invest, you could buy and hold a basket of stocks, such as those in the S&P 500…more specifically, buy an ETF that resembles the S&P 500 like the SPDR S&P 500 ETF Trust (SPY).

You can easily start keeping more of your money by passively investing in ETF’s (Exchange Traded Funds). Since 95% of the funds can’t beat the benchmark going into the SPDR S&P 500 ETF, with a 0.09% expense ratio, provides a better option. The S&P 500 is composed of 500 of the largest companies, by market capitalization, which provides more than enough diversification for the casual investor.

If you want to generate ideas and returns in the market, then you’re going to enjoy this little bit of research…

I discovered some great research from tastytrade.com in which they back tested active trading and passive investing strategies from January 2000 through January 2015.

The three active trading strategies they back tested were: holding the S&P 500, while selling a 1-month at-the-money call on the SPX; holding the S&P 500, while selling a 1-month 2% out-of-the-money call on the SPX; holding T-bills, while selling a 1-month at-the-money put on SPX.

Conversely, they tested one passive investing strategy … just plain buying and holding the S&P 500.

If you are not familiar with options, or how they work … that’s okay … but stay with me.

You’ll be surprised when I tell you that the passive investing strategy only had 56.4% of months with positive returns. You’ll also be surprised when I tell you the active trading strategy involving buying and holding T-bills, while selling 1-month at-the-money put options on the SPX, had 71.3% of months with positive returns.

The more active approach generated a higher percentage of months with positive returns than the passive investing strategy. This goes to show my belief … that actively using options to trade or invest could be used to stack the odds in your favor and provide a higher probability of having months with positive returns.

In any event, doing something proactive is a lot more encouraging than hoping and praying that a mutual fund manager will deliver the goods.

I, at least, hope I shed light on one of the dirtiest businesses in the financial services industry.

I believe the next step for investors who want to create wealth, freedom and options: is by taking control of their investments.

There’s a lot of noise out there and opinions. That is why what I have below is going to be best next step in that journey.

Sure it’s going to be a challenge, but like Robert Arnott once said:

“In investing, what is comfortable is rarely profitable.”

The ball is on your court… what are you going to do?

Learning to trade options does not require being glued to the computer, or hours of research and study. No longer will you feel money managers have some secret formula you are not privy to.

Tired of making other people rich off your hard earned money. Take control of your investment future today and learn how options can enhance your investment returns and help you reach your financial goals.

For this reason I wrote Fearless Investing With Options.