Mutual Fund Secrets Financial Advisors Won’t Tell You

imagesYou’ve probably heard “mutual funds” talked about as investments you can make in your 401(k) or IRA. A mutual fund simply pools the money of its investors and invests that money in stocks, bonds and other investments. These funds give you access to a diverse group of investments without requiring you to make each individual investment. Leave it to the pros, as they say. Unfortunately, those pro’s have a few secret’s they don’t want you to know.

For their services, the mutual fund companies – Fidelity, Franklin Templeton, and American Funds, for example – charge a fee of anywhere from 0.25% to 3%.

And therein lies the problem. These fees make it very difficult for the mutual fund managers to meet or exceed their target return or benchmark (you’ve may have heard of the S&P 500, the most popular benchmark for stocks). As evidence, only about 1-in-3 mutual funds has beaten its benchmark over the last 5 years! But don’t expect a financial advisor to tell you that – they’re often paid a fat commission to sell you these types of funds.

A cheaper and more reliable alternative is an Index Fund, which simply aims to track a particular benchmark. For example, the Vanguard 500 Index Fund just owns all of the same holdings in the S&P 500 index – so, your performance is no better and no worse (except for a minimal fee, often less than 0.20%). This type of low-cost investing has proven to be more beneficial to the average investor over the long-term. Given the choice, stick to index funds over mutual funds to avoid high fees that eat away at you returns.

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