What's a great way to make a buck?
No, this is not a joke. And if it were, you wouldn't like the punch line.
Answer: start a mutual fund.
Here's the first startling factoid: mutual funds always get their commission, typically around 2.5 per cent for equities and around 1.5 per cent for bond funds, but positive returns for investors are not guaranteed.
"Mutual funds are dependent on people who don't know how the system works. The investment industry is about selling products. And the system is designed for maximum profitability for mutual fund companies, not individual investors," says Warren Mackenzie, CEO of Weigh House Investor Services (formerly Second Opinion Investor Services). Weigh House is not affiliated with companies selling investment products of any kind, and so is not compensated by them.
The second startling factoid is that, during a 10-year span, most mutual fund managers don't outperform the Standard & Poor's Indices Versus Active Funds (SPIVA).
"In fact, 97 per cent of mutual fund managers don't outperform the index," says Mackenzie. The rule of business – paying for performance – doesn't seem to apply to mutual funds. And, Mackenzie adds, Canada has some of the highest mutual fund MERs (management expense ratios) in the world.
So, if you've decided to become a do-it-yourself investor, here are some tips and traps from investment veteran Mackenzie:
Know who you're up against. "In online trading, there are too many factors that affect the markets. Plus, when you're trading, you're trading against professional traders – typically a roomful of PhDs – with very sophisticated software and mysterious black boxes," says Mackenzie. The odds are not in your favour that you're going to beat professional traders. Plus, DIY investing is not a shortcut to long-term success.
Understand that DIY investing is a trade-off. Determine how involved you want to be in your own investments. "Be honest about your skills and knowledge as an investor," says Mackenzie.
"Doing it yourself requires at least a few hours each month and you need the discipline to follow through with your investment strategy. Time is money, and what you save in fees might be more than offset by the amount of time you spend managing your own investments," says Mackenzie.
Are you emotionally equipped to handle the volatility of the markets? "Be aware that it is one thing to do-it-yourself, but it is another thing to do a good job. Not everyone is emotionally equipped for DIY investing. Don't try it unless you can follow an investment plan that minimizes the effect of emotional reactions," says Mackenzie.
"Know when to fire yourself," he adds. Are you taking on too much risk? Or, are you failing to track how you're doing, compared to your own goals?
Have a strategy. Have a well articulated, written investment strategy. Set realistic goals. Target asset allocation and target asset allocation ranges. "Diversification is the only free lunch in investing," says Mackenzie.
Keep it simple. "Complicated portfolios generally reduce performance–they hardly ever improve performance. Plus, the more complex the product, the higher the embedded fees," says Mackenzie. Don't buy what you don't understand.
Control your fees and commissions. "In many cases, the difference in performance can be attributed to fees. Understand all the costs you are incurring," says Mackenzie.
"Over a lifetime of investing, 2 per cent higher fees will amount to more than $500,000 for a typical investor," says Mackenzie.
Manage risk. Understand all your risks including: inflation, deflation, currency exchange, interest rates, and so on.
Don't try to beat the market. "Be sensibly diversified and buy low-cost ETFs instead," says Mackenzie.
"Being an average investor is very easy. Being an exceptional investor is very difficult. With investing, it's okay to be average," says Mackenzie.
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