Mutual Funds vs Simply Investing

In this example let’s take a look at $10,000 invested in mutual funds and $10,000 invested on your own, what I like to call the Simply Investing way.

Both methods are simple, in option #1 you simply handover $10,000 to your mutual fund advisor. In option #2 you simply deposit $10,000 into your trading account and purchase quality stocks when they are undervalued.

After 10 years which investment will be better? Take a look at the table above, and you can clearly see that the Simply Investing approach is far better for you. Here is a description of each row in the table:

Initial Cost

Mutual Funds

Some mutual funds charge a fee just to get started. Here are some of the fees:

• Initial registration fee to open an account, this ranges anywhere from $25 to $250 and up
• Front-end load, this fee is charged when you buy a mutual fund. This fee ranges from 3% to 8% and up
• Back-end load, this fee is charged when you sell a mutual fund. This fee starts at about 5% to 6% and incrementally decreases for each year you own the funds

There might be some other additional fees and can read about them here and here. In this example I’ve used a 5% front-end load.

No-load mutual funds do exist, but the fees still add up to thousands of dollars (see example below of a no-load mutual fund).

Simply Investing

In the Simply Investing approach of buying quality stocks when they are undervalued, you simply open a trading account and place an order to buy stocks. In this example I assume you purchased stock in 2 different companies, the fee for the purchase order is $9.99 x 2 = $19.98.

Some places charge just $2.50 to place a stock purchase order, but generally the going rate is $9.99 so this is the number I used in the table.

First Year Fee

Mutual Funds

All mutual funds charge an annual fee called the Management Expense Ratio (MER). MERs range on average from 0.2% to 5%. In this example I used an average MER of 2.2%.

2.2% of $10,000 is $220.

Simply Investing

When you buy stocks on your own, there is no MER.

Ongoing Annual Fee

Mutual Funds

As I stated above, all mutual funds charge an annual fee called the Management Expense Ratio (MER). MERs range on average from 0.2% to 5%. In this example I used an average MER of 2.2%.

Over time MERs can really add up and have a negative effect on your earnings.

Simply Investing

When you buy stocks on your own, there is no MER.

Total Fees after 10 Years

Mutual Funds

$3068.24 is based on the Mutual Fund Fee Calculator. I entered the following values in the calculator:

• Load: Front-end load of 5%
• MER: 2.2%
• Other fees: $0
• Past Return: 4.5%
• Investment amount: $10,000
• Investment Held for: 10 years

Here's another example using a no-load mutual fund, and the total fees come out to: $2703.41

• Load: No-load (0%)
• MER: 2.2%
• Other fees: $0
• Past Return: 4.5%
• Investment amount: $10,000
• Investment Held for: 10 years

Simply Investing

Aside from the initial cost of $19.98 there are no other charges to owning stocks.

Overall Gain after 10 Years

Mutual Funds

In this example I used two actual mutual funds currently available from the two largest banks. Their overall gain from the last 10 years has been:

Mutual Fund #1: -0.70% (North American Dividend Fund)

Mutual Fund #2: 1.67% (U.S Growth Fund)

I took the average of the two mutual funds to come up with: 0.49%

Update: Some folks suggested that the two mutual funds I selected above were not representative of the true returns of funds in this category. So, here are the typical returns (since inception) of some other mutual funds:

TD North American Dividend Fund 3.1%

TD US Blue-chip equity 1.9%

BMO North American Dividend Fund 4.47%

AGF Dividend Income 1.64%

Criterion Global Dividend -6.34
NexGen Canadian Large Cap Reg Sr F -0.45
NexGen Cdn Div and Income Reg Sr F 1.46
PH&N Canadian Income-B (Adv) 0.45
VPI Canadian Equity Pool-B 0.28
VPI Canadian Income Pool 3.21

 

The average of these comes out to: 0.972%

There are thousands of mutual funds out there so I tried to find mutual funds that:

• have been around for at least 10 years
• are primarily dividend funds
• invest in large cap
• covers CDN or US or both markets

I selected the samll sample of funds above because, my portfolio is a dividend portfolio, made up of large caps and I invest in both US and CDN markets.

I know there are some mutual funds (growth funds, hi-tech, small cap, emerging markets) that might perform higher but their investments do not match the type of investments I make.

Simply Investing

In this example I used two actual stocks that I’ve owned for many years, here are their returns:

TransCanada Corporation (TRP): 293.2%

Empire Company Limited (EMP.A): 58.4%

I took the average of the two stocks to come up with: 175.8%

The Simply Investing portfolio has gained over 141% since 1999.

Here are actual returns on my investments that I've sold in the past:

WMK  61.57%

SO 67.72%

Emera 16.04%

RioCan 79.05%

Dofasco 48.17%

Cascades 53.60%

Sobeys 49.33%

Canadian Utilities 57.32%

ATCO 68.15%

Long Drug Stores 67.46%

Lawson Products 82.56%

JP Morgan Chase 51.01%

General Electric 27.72%

Eastman Kodak 6.41%

Caterpillar 69.94%

Mutual funds make poor investments, and I’ve written about them before here and here. Stop handing over your money to mutual fund sales people. Save your hard-earned cash, and invest it wisely. It’s not that hard to learn how to invest on your own. Invest for yourself by yourself and you can achieve financial success sooner than later!

Comments

[My Own Advisor]

"Save your hard-earned cash, and invest it wisely. It’s not that hard to learn how to invest on your own. Invest for yourself by yourself and you can achieve financial success sooner than later!"

Very nicely said. Good data above as well! Well done.

[Kanwal Sarai]

Hi MOA,

Thanks for the comment! I just had a conversation with someone today about investing, and we concluded that most people spend more time researching the latest smart-phone/TV/laptop to buy than they spend on where to invest their money.