ETF vs My Mutual Fund

Bycjrosen

How great did your mutual fund do this year? Mine underperformed.

I try not to look at the performance of my long-term retirement/mutual funds because

  1. I want to trade them
  2. I get very angry
  3. I wish I were invested elsewhere

The same cycle is true again this year, and this may be the death knell in the coffin for my mutual funds.

I am invested in five diversified funds with different money managers, and four out of the five underperformed the S&P 500 index, some by more than an amount I’m comfortable with.

For about two years now, I’ve favored ETFs over normal, diversified mutual funds, but have not made significant changes in my long-term investment objectives as directed by my financial adviser.

I am a trader, I prefer short-term impulse patterns in the market, and I am most comfortable with the variables that influence short-term price movements in market indexes and selected stocks.

It is for that reason that I trust my longer term investments to those I feel far more qualified than me, including my personal financial advisor and the money/fund managers in which my professional trusts.

However, for the last two years, my largest fund has underperformed the S&P 500, and subsequently has underperformed the SPY, an Index Exchange Traded Fund in which I could be invested and pay about .5 basis points instead of just under 2.0 basis points that I pay now for these professional fund managers to underperform the market.

So when you see the next chart, realize that I had to pay a fund manager (or group of managers) approximately 2 additional percent to underperform an index where I would have been guaranteed market returns for the year:

The SPY (ETF) appreciated just over 4% this year.

My largest mutual fund (which will mercifully be unnamed) lost just under 8%. When you add the 2% management fee, I lost 10% of my portfolio value that was invested in that fund.

Needless to say, I am extremely unhappy and will very likely will be switching funds upon the next meeting with my advisor. In fact, I may be pulling the money together and placing a part of that in bonds or in the DIA (Dow Jones ETF) or SPY (S&P 500 ETF) so that – at least – I know I will reap what the market returns, and will save on management fees.

I sincerely hope your mutual fund portfolio did better than my professionally managed portfolio this year, but if not, may I recommend you browse around the internet and read up on the wonderful benefits of Exchange Traded Funds. Don’t be afraid to make changes if need be.

Here is a quick summary of some key benefits of Exchange Traded Funds:

  • Directed Exposure (and diversification) to certain market segments (or sectors)
  • (Significantly) Lower expense fees (due to no ‘money managers’)
  • Intraday Entries and Exits (as opposed to end-of-day repositioning of your money)
  • Immediate access to your money (same reason as above)
  • Guaranteed market returns (of your ETF’s Index) with no chance of significant underperformance, but you’ll also never outperform the index
  • Total Control of your money (which can also be a negative)

May everyone have a Happy New Year!

Similar Posts

| | |

Long Term Monthly Fibonacci Levels to Watch in the NASDAQ

Bycjrosen

Per a reader’s comment, I wanted to show a quick reference grid of the NASDAQ Index stretching back to the 2000 peak above 5,000 and show three dominant Fibonacci Grids to watch as price moves into the future.

Let’s see the 10-year grid, starting with the 2000 high and stretching to the 2002 low.

Nightly Index Overview

Bycjrosen

Let’s take a quick visual overview of some key market indexes and where they stand as of now. First, the US Dow Jones Index (daily): Classic technical analysis would be forecasting prices beneath 11,800 due to the perceived bear flag which has formed and has resolved halfway, but it seems like this hypothesis is currently…

8 Comments

  2. Corey,
    I read your blog every time you publish and I like what you have to say. The following
    you already know, but I will say it just so you hear it from someone else. Stop
    paying those money managers. They are guessing just like everyone else. They have
    rules about what they can do with your money. Take all your current mutual fund
    money and put it into low cost index funds (Vanguard for instance), and just let it
    ride. This is your long-term money, the 20-30 year money, and since the historical
    trend over the last 100 years is up, there is no reason to think it won’t continue
    that way. With long term money you are not trying to hit home runs. You just want
    to bat .300 every year. I love ETF’s as you described, but, like you, I have a need
    for short term action and it is too easy to sell the ETF’s you may use for your
    long-term investments. In a market correction, you would be tempted to sell those
    ETF’s and then you would become a market timer with your long-term money. We both
    know that there are no (maybe one or two) successful long-term market timers. With
    your short-term money you can keep day or swing trading and add profits. You have
    the correct program mapped out. Just blow those “guru” money managers away, and
    think hard about whether ETF’s or their equivalent mutual fund index would be best
    for you considering your self-admitted short term impulses (perfectly normal, I think
    most people would act the same way if they could trade mutual funds like stocks).
    Keep on informing us with your great blog, and have an extremely successful investing
    and trading year in 2008.

  3. Thank you Reno and John for your comments.

    I will definitely be selling the funds in favor of ETFs, but I must promise myself not to trade them, as they are meant to be long-term investments.
    It’s true that mutual funds sometimes outperform stock indexes, but I would rather sacrifice those “sometime” gains for certain market performance, so that I will be ensured never to under perform, and I also will be insured against paying management fees.

    I will take your comments to heart, and very much appreciate them as well as your support.

    Corey

  5. Happy New Year Corey!!! I hope you had a great one!

    I have been wondering what I should do with my long term money. I often get tempted to just trade in them. I have heard of people trading conservative options plays like covered calls or even spreads in their retirements accounts as a diversification. I thought it was an interesting idea but don’t know if I would have the power to just limit it to those strategies only.

    Talk to you later! BTW… I may take the plunge and start the blog soon!

  6. excellent analysis as always, if you want some info on international etfs i recently took a look at them . . . i can send a link if you would like. best of luck with you investing in the new year, keep up the outstanding work.

    mark

  7. Pingback: Anne

Comments are closed.