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I always love these titles. You go on any stock market-related site or subscribe to their magazine and you’re bound to come across “The Best Mutual Funds with the Highest Dividend Rates This Year” or “The Best ETFs this Summer to Invest in”. It’s so dumb and it’s all recycled material anyway.
There’s hardly any such thing as the best mutual fund to invest in. Especially when you consider 99% of actively managed US equity funds underperform.
When you look at it that way, you figure what’s the point there’s no hope in putting my money with anyone, I’d rather have it under a mattress. And who could blame you when you read 99% of mutual funds aside from the ones included in that statistic in the article ended up closing up shop, and aren’t even taken account for in the statistics you read about, because financial companies know you technically don’t have to consider mutual funds that are no longer in existence.
The thing is, most people don’t truly understand the difference between a mutual fund and an index fund, which is in my opinion where all of the problems lie. A mutual fund is a professionally managed fund of money from several investors. These investors put their money with someone who deems themselves as capable of beating the market. They can invest in stocks, bonds, whatever.
But, there are a couple of problems with this. First, there are thousands of stocks to choose from. The finance professional is put in a bad spot that advocates immediate returns, or else. Since he or she has this mindset, they lose focus of the big picture and begin literally trading in and out of stocks on a frequent basis. That’s all well and good if they’re clairvoyant.
If they’re not, then you’re pretty much done for. The trading fees and costs alone will ruin your performance by probably at least a couple percentage points. The average total fees are 3.1% in a mutual fund.
And second, since they’re buying and selling with other people’s money and not their own, it’s tough to have the same mentality as if the money was their own. Chances are they aren’t doing the proper research and due diligence that’s required to make a sound investment. On top of that, they’re still getting paid to manage the fund regardless.
On the other hand, an index fund is a mutual fund that is not managed by an individual and simply tracks an index, like the S&P 500 index. This is where I have all of my 401k money stashed away.
If you want to sleep at night, this is the only mutual fund you should be owning. No active management, no insane fees, just low-cost, average performance that beats the majority. When you realize you could have turned $10,000 into $51 million just from an S&P 500 index fund if it existed back in the day, you know you can’t go wrong.
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So here’s what you should do starting this weekend:
If you realize you have bad investments, put it all in cash
If you’re looking at your portfolio and you realize you’re invested in mutual funds charging you north of 1%, I’d even go as far as .5%, sell the position. Anything that is charging you at least .5% is most likely a rip-off. There’s just no need when index funds exist. Take everything out and reexamine how much money you have and try to understand the consequences if you had kept the money in that mutual fund or even worse, annuity. Especially if you’re not even in your 70s, there’s zero need to worry about the market going down, it always goes back up.
Take all the cash you have just sold and put it in an S&P 500 index fund
Until you truly understand the ins and outs of the stock market, understand how to read a balance sheet, an income statement and a cash flow statement, keep the money safe in an S&P 500 index fund. It’s the best way to go for someone who doesn’t understand or doesn’t have an interest/the time to study the subject at all.
And if you want to take it a step futher to invest on your own:
Read the books in my recommendations list and then some
The reality is, you need to be constantly reading, constantly learning. If you don’t keep up, you’ll never be successful if you one day want to take the reigns and invest in stocks yourself. I literally couldn’t finish a book for the life of me in school. Like a 4-book summer reading list made me want to kill myself in 4th grade. You’re like 10 in 4th grade how can someone even hate something that much at that age? And then later on my best friend was Cliff Notes in high school.
But once I realized I could actually understand this finance stuff if I was patient with it, I’ve been trying to read as much as I can for the last 4 years. You’d be surprised how far you’d come if you did the same. I literally knew nothing, I didn’t even know what a 401k was.
Listen to all of the Berkshire Hathaway shareholder meetings going back to 1994
Yea it’s a hell of a lot of time to put in, but really, when you think about it, all you’re doing is just sitting there or walking or whatever listening to it. I did it, and I’m not exhausted from it, I’m good. This is probably the most important thing you can do because over the years people who come out to Omaha for it tend to repeat the same questions every year, give or take a few. It’s good because you really begin to have the important stuff drilled in your head. It gives you a solid foundation to build upon. I won’t ruin it and spoil it for you, so go ahead and get started.
Read The Wall Street Journal every day
Every morning on my commute before I can get a seat on the PATH train, I read The Wall Street Journal. I can usually get in 3-4 sometimes even 5 articles before I have to transfer and start reading whatever book I have on me at the time. Now that I finished listening to all the Berkshire Hathaway shareholder meetings, I can honestly say this is the most important habit I’ve developed. Reading the paper helps you stay in touch with what’s going on in the world, and especially since it’s The Wall Street Journal, it helps you stay informed on what’s going on in the financial world. There’s no way I’d feel confident investing on my own if I didn’t read this every day.
Pick a book to read every day
As long as you keep it non-fiction, you literally can’t go wrong. I mean you can, but you know the difference between a book that’s all fluff and one that actually challenges you. I’ve read biographies, biographies on businesses like Pixar, investment books obviously, books on Silicon Valley, just a wide range of stuff that gives you a general view of how everything is connected in one way or another. I used to never be able to sit even 5 minutes without getting antsy, and now if I don’t read for at least an hour a day, I get anxious. Make it a deliberate effort to read even just for 3 minutes every day and go from there, you’ll thank yourself.
So if you really want to give it a go and not just invest all of your money in an index fund, please make sure you try to follow the steps I listed above. It’s helped me a lot, so I know if you’re a beginner too or even just aren’t that familiar, it’ll do you some good. It sounds easy, but it took a lot of focus on my part to learn all of this stuff on my own, but I was able to do it, mainly just because I hate working in a cubicle so much. But hey, whatever motivates you I guess.
If you don’t want to, that’s cool too, just make sure the only mutual fund you invest in is an index fund, preferably an S&P 500 index fund.
Is there anything else you would’ve added to the list?
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