Recently I heard the magic of index funds. And let me tell you the song they sung was amazing. It goes like this; If you invest 100,000 dollars for 50 years in a mutual fund that charges you two percent management fees, your hard earned money would end up paying 2/3 of the grow to the company not to you, even if you got 7% annual interest. And skeptically, I checked that math out. I could not believe it. It seems that yes indeed the increase in value is like 6 million to a mere 2 million. Thus the house takes 2/3 of the value. The solution is to invest in an Index fund where they do not charge high management fees. I really had to dig deeper on two fronts, the initial claim and index funds. First, let’s look at index funds; the average index fund is based on the investments held in say the Dow, of TSX or even London or Paris etc. Take a stock exchange anywhere and invest only in the companies listed on that exchange. This is an index fund. When the index goes up you go up and when it goes down you go down. So Bull is bullish and bear you just got to grin and bear it. The simple fact is they do charge lower fees but not significantly lower and the rates of return for those lower fees also show it. They are charging less but they are getting less. Remember 50% of all indexes do not bet the average. So I would hold off on investing my money in an index today, and keep reading.
The initial claim, of 100K and 50 years is also suspect. It is used because it is a round number and the math shows out the claim. I do not doubt the claim, because I have run the math and looked at the resulting growth graphs. I question the premise. How many 15 year olds have 100 K? Why 15 years of age? Well retirement is 65, take away 50 years and you have 15. Most people do not have that kind of money so they invest in 10 and 20 denominations. Also, they do not start until they are in the twenties and thirties making the overall gains to be about 20-30 years, not 50 years in the example. But why is it so important to be 50 years? Because, the really spectacular gains occur in the last 20 years, where compound interest kick‘s in a lot harder. So what I say here is; don’t worry about management fees. Of course always try to get the lowest fees you can get. But paying them 1-2% is fair for the work they do to create the whole mutual fund itself.
Last thought on where I should invest my money? I would take my money, and I have and invest it in the dividend stocks mutual fund. Basically, to be in the class of a dividend mutual fund you have to pay a dividend. This is free money the company is giving you each quarter. It can be used to buy more shares for a locked in account like an RRSP of 401K, or it can be cashed out for other types of investment. But there is another factor at play here. The stock itself can go up in value over time. So you gain twice, once from the quarterly cash injection and second from the increase in value for the stocks held in the portfolio. Lastly, is the bonus growth from having, usually, lower than average management fees. There is little trading cost for a dividend fund, as they tend to stay with the same stock for years on end requiring only that they pay the dividends agreed to. Most companies do that anyways.
Before investing or buy any sort of mutual fund or stock, please speak with a competent professional. Be sure to establish they are licensed to give advice and are registered with your local, state or provincial government. Never use cash to invest person to person. Always use cheque or bank payment systems to protect against fraud.
When in doubt, check things out. If it is too good to be true, then it usually is too good to be true.