Over at Investing Intelligently, Dave has been agonizing with how to set up his RRSP. There are so many mutual funds to choose from. In fact, there are way more mutual funds than stocks available! I am sure that in the US, the problem is even larger! There are literally thousands of mutual funds to choose from.
As you all know, I hate paying fees. I avoid actively managed mutual funds when possible and go with low-cost index funds. This is a personal choice.
There is a fantastic website that offers 133 reasons “Why I Refuse to be Sold Mutual Funds.” The website is run by Tom Connolly and he is an avid DIYer. His basic concept is to invest in companies that consistently grow their dividends.
Check out his website. Scroll to the very bottom. The first two reasons are located there. The other 131 reasons are found here. It is a great (and funny) read.
I would love to subscribe to his newsletter, but unfortunately, he is not taking any new readers.
3 users commented in " Mutual Funds are Sold - Not Bought "
Follow-up comment rss or Leave a TrackbackWe can’t forget the main advantage of mutual funds. Diversification at low-cost. People complain about MERs until they are blue in the face but they never compare the cost of purchasing a diversified list of stocks. With $20,000 if I bought 20 Canadian stocks, 20 US stocks, 20 International stocks, and 20 bonds I would be looking at huge one-time fees. Of course when you have a small portfolio you could just as well go with an all-index portfolio, meaning you could just buy ETFs. Even still buying ETFs is expensive and with so little cash you couldn’t do it on a monthly basis so you will still need some funds. You could go with index mutual funds there. Mutual funds are for starting out, like training wheels. Once you reach some critical mass of wealth (I don’t know, $100k-$200k maybe?) good pricey active management (or really really good mutual funds only available to rich people) is what you want, not mutual funds.
Mutual funds do offer diversification but here are my points:
1. I buy low cost index funds. I add to them regularly. Once I get to a large enough amount (trading cost less than 1%), I then go ahead and buy the ETF that corresponds to that mutual fund. Also, if I have to do rebalancing, I do it within my index funds and not my ETFs.
2. There are inexpensive ways to own stocks. I am a dripper. I currently own around 15 Canadian stocks and I plan to start purchasing US stocks soon. I can buy these stocks (either monthly or quarterly depending on the stock) at no cost. And, I can send them a very small amount of money and they will buy me fractional shares. In the US, there are a large of amount of free and low fee DRIP plans available. There is a great article over at A Frugal Focus on Starting a DRIP.
3. And as for diversification, you can be overdiversified. There are people who might own 3 different equity funds. With all 3 funds, it is probably like owning the index except that you pay active fees! I believe that I read somewhere that you could be well diversified with as little as 10 different stocks across different sectors.
4. And MERs are not the only problem. If you check out Tom Connolly’s 133 reasons, the MER just happens to be his number one reason. Check out all the other ones and you will get a new appreciation for mutual funds in general.
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