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Why I Don’t Like Mutual Funds

I was happy to see that Andrew Hallam in his book, The Global Expatriate’s Guide to Investing: From Millionaire Teacher to Millionaire Expat dislikes mutual funds as much as I do. It actually surprises me that more financial gurus, such as Dave Ramsey (from The Total Money Makeover) don’t jump off the mutual fund bandwagon and onto the index investing or dividend stock investing one.

Anyway, mutual funds are a pretty terrible investment choice especially if you’re from Canada since Canucks pay the highest mutual fund fees in the world (2.2%-compared to an average of about 1% for the rest of the world).

Another reason why they’re pretty terrible is that they quite often struggle to beat the market indexes (like the S&P 500). If they do happen to beat the index, the average investor probably won’t see that return because much of it will be gobbled up by the fees talked about previously.

Think about it this way. If you’re invested in a fund that has an expense ratio of 2% (to say nothing of front or back end loads!), the mutual fund manager has to be at least 2% better than the market in order for you to come out “even.” This isn’t easy to do, especially for less “risky” things like bond funds or blue-chip value funds where there is a very limited range of things that the manager can actually invest in.

Even with no research, someone would be much better to just put all their money into something like Vanguard Total World Stock (VT) with an expensive ratio of only 0.18% than any of the mutual funds out there.

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