Although people sometimes are nervous about the volatility in the stock market, investing in equities has been incredibly successful in the long term. Since 1980 the 500 largest American companies have increased 18 times in value and the Toronto Stock Exchange has increased it’s value by 8 times. These increases include the large drops in 2000 and 2007/2008. The indexes have outperformed any other investment.
Investing for myself has had great benefit for a few reasons:
- Giving my money to someone else takes about 2% off of any returns. This is the case with many managed funds regardless of their performance. Statistics do not indicate most money professionals perform any better than the indexes.
- I have fun doing it. I share on the Royal Bank Direct Investing forums and so do thousands of others. We all enjoy the satisfaction of developing our investments and sharing our ideas.
- I feel I know myself better than a money manager. I like investing in businesses I know and building large positions in quality businesses when I feel the market has undervalued them. Also I like the fact that when I feel the market is risky I can allocate my portfolio to minimize risks that I see. A money manager may be not see the same risk as I do which is a helpless feeling.
Beating the Market is difficult – Do not pay people to under perform the indexes
It is difficult to beat the market and most professional money managers do not out-perform the indexes. Canadian Couch Potato says:
“Standard & Poor’s reports that over the five years ending in 2013, about 22% of actively managed Canadian equity mutual funds delivered higher returns than their benchmark index, while the figure for US equity funds was about 12% and for international equities was just under 14%.”
A 2013 MoneySense article, by David Hodges also points out:
“If you buy mutual funds through a bank or mutual fund sales specialist (as many investors do), you’re likely going to be charged management fees (or MERs) well above 2%”
and that 2% is an annual charge regardless of the performance.
When I consider the markets average about 8 to 10% annually then the management fees of 2% reduce the return to 6 to 8%. Compounding is one of the most important parts of making money in the market and taking 2% away can make a big difference in the long run. Also it should be mentioned returns are also reduced by inflation which has been anywhere from 1-2% over the last few years. As a result giving up any percentage to a money manger can be significant unless they really perform well over time.
On the other side commissions are paid when buying stocks or ETF’s but with online transactions these are less than 1% on even a $1,000 transaction. Also if you hold for years the commission cost on the holding is one time where managing fees for funds are annually.
ETF’s do have management fees but they are often lower than mutual funds. If you hold $2,000 a fund for 4 years it would cost you $160 versus an index ETF like the index for the 60 biggiest companies on the TSX the management fee is .17% which you would buy on the market exchanges and pay 9$ commission plus four years management fees of $13.60 for a total cost to hold for four years of $22.60. Much less than the actively managed 2%.
Of course if you purchase the stocks outright and hold for years you only pay the 9$ commission. For long term holds this may be the only service charge you get but of course when you sell you will have to pay the commission again. For a $5,000 transaction the commission is less than two tenths of a percent and over time this is insignificant compared to 2% annually.
Managing Your Own Money can be satisfying and fun
When I had money in mutual funds I used to get a report and it showed me hundreds of stocks with results that were not that impressive and as I mentioned I was being charged for it. I knew nothing about what their strategy was except that it was a balanced fund because I could not figure out what to get. In the end they all were so diversified that there was not a lot of distinction.
Investing for myself helps motivate me to save money so I make contributions and invest in a fashion that I believed in and understand. Now my first 10 years were not successful and I hope this site will help some of you to research investing styles carefully and learn what can work so you do not do 10 years of trial and error like I did.
I enjoy watching my portfolio perform and am always looking at it’s future. Building a portfolio takes time for an income like mine but I am now seeing it grow and the benefits of scale are coming in. I am still building my portfolio and it has a ways to go to get to the allocation weights I want to see.
Two videos covering four great reasons why I invest for myself. Compares mutual funds, etf’s and stockpicking. Do it yourself investing does not have to be hard and even using low cost etf’s can help returns.
StockStory is not a financial advice site and content should not be considered for investment recommendations.
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