Mutual Fund Investing

Mutual funds are a very popular investment.  For many people they are the core investments in their portfolios.  But, a lot of people are too complacent about their holdings – they don’t know exactly what they have and trust in their financial advisors too much so they end up in the “financial product of the month” that offers the advisor the best commission.

Mutual Fund Investing

Some people are happy when they see an increase, and switch to some other mutual fund company when they see a loss (or cash them in altogether and really take a loss).

Some people worry about high management fees and stick with lower cost index funds or switch to ETFs.  There’s nothing wrong with these products as long as the reason you hold them is not entirely because you save money on fees.  Some higher MER growth funds can outperform the index giving an overall higher return.   ETFs don’t lend themselves to a regular purchase plan because of commissions when you buy them (like a stock).

In my opinion, mutual funds can be a very good investment for people in certain circumstances for these reasons:

  • Easily available through banks and fund companies such as Investors Group.  Generally no fee to set up an account and advisors to assist in building a portfolio.
  • Low cost purchase plans – some as low as $25 – are a good way for younger and/or lower income people to start building up their investments and get them in the savings habit with fixed regular contributions that also have the benefit of dollar cost averaging.
  • An easy way to diversify a smaller portfolio by holding different types of asset classes, management styles and geographic locations.
  • A good way to take advantage of foreign investments that would be difficult to purchase otherwise.
  • After purchasing the initial funds there is no direct involvement in the managing of the securities (done by a professional fund manager) for those who have no experience or interest in making these decisions.

Also, in my opinion, when a mutual fund portfolio exceeds around, say $50,000, it’s time to purchase a stock portfolio.  After the initial purchase fees you will have no other management fees.

You can choose the top 10 stocks of an index or dividend ETF for a good start if you don’t know what to buy.  A buy-and-hold strategy avoids having to make decisions of when to sell.

You benefit from both growth and income if you hold dividend stocks for the long term.  Overall, I think you would end up making more money.

I like to read about different investment styles that other people choose.  What is your investment strategy and why did you choose it?  What are your thoughts on an ETF vs mutual fund?

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  1. Ian Brennan on November 4, 2010 at 9:09 am

    Because I want to achieve better-than-market returns, I use basic fundamental analysis to determine what to buy, and basic technical analysis to determine when to buy. I buy stocks and ETF’s when the market is trending up, and inverse ETF’s when the market is trending down. Personally, I gave up on mutual funds since none of the funds I owned outperformed the market for any significant period of time (if at all). Also, I was told in no uncertain terms that I was not to be switching within families of funds too frequently. You might see my approach turning into a full time job, but that has not turned out to be the case. Simple is beautiful in my world.

  2. Canadian Couch Potato on November 4, 2010 at 1:43 pm

    @Ian: If none of the professional fund managers you hired were able to outperform the market, despite the enormous resources at their disposal, why do do you believe that your fundamental analysis can succeed where they failed?

    @Boomer: To suggest that firms like Investors Group charge “no fee to set up an account” is highly misleading. While they may not charge you an account fee, the long-term costs of buying mutual funds through companies like Investors Group is appallingly high. Most still have DSCs that lock in unsuspecting investors for years as they slowly bleed you dry.

    In my opinion, investors with less than $50,000 don’t need a customized portfolio. They would be far better off just buying a balanced mutual fund for 1% or less, and they can get that without an advisor.

    • Boomer on November 4, 2010 at 4:58 pm

      @Couch Potato: What I mean to say is that, for the small investor, mutual funds are easy to buy and usually no cost to set up an account. High fees, especially DSCs are things that need to be understood before purchase. Perhaps strong-arm sales practices and non full disclosure set up some unsuspecting and naive beginning investors and this is unfortunate. That’s why I strongly believe in educating yourself as to what you’re investing in. Also, I include bank sales staff as “advisors” as that’s what their titles usually are. I agree you don’t need a financial planner in these cases.

  3. Ian Brennan on November 4, 2010 at 2:18 pm

    @Canadian Couch Potato

    Two reasons, actually.

    One, they are, basically, buy-and-hold, whereas I can buy a few investments at low prices and sell higher. Two, I make money when the market contracts while they are losing money.

    I like your own approach, but it has almost a zero probability of beating the market.

    • Boomer on November 4, 2010 at 5:08 pm

      @Ian: I think your approach is probably too complicated for a novice investor. Mutual funds basically take the decisions out of their hands until they educate themselves more about buying and selling (if they choose to). You obviously have investment experience and know how to research.

  4. Financial Cents on November 4, 2010 at 2:33 pm

    Good post.

    I think MFs make sense for some folks starting out, although if I knew 10 years ago what I know now, I’d follow Canadian Couch Potato’s TD e-funds model if I had limited funds to start with, say <$25,000.

    Not that I don't have limited funds, still, 🙂 but because I'm a little ways down the retirement road, I overwhelmingly prefer ETFs like XIU and XBB in my registered accounts; much better for me than any MFs.

    I too, really enjoy reading about different investment styles.

    Mine can be summarized fairly easily:
    1) I am primarly a dividend investor for all non-registered accounts, since I want dividend income as passive income in retirement.
    2) I am an index investor, for the most part, for all registered accounts, since I want ETFs to compound over time without fees eating away at my RRSP.

    • Boomer on November 4, 2010 at 5:11 pm

      Mutual funds worked for me 15 or so years ago. Now, like you, I am primarily a dividend investor. I have never purchased ETFs – no reason why not.

  5. Dr Dale Rathgeber on November 5, 2010 at 10:05 am

    I: agree with using ETFs; disagree with passive/lazy investing; and say that recommending Investors Group is shameful.

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