Here in Canada, it is RRSP season (RRSP = Registered Retirement Savings Plan similar to the US’ 401K) where an individual can contribute to their retirement a certain amount based on their income tax free.
So we’re bombed at this time of year with financial company and bank ads demanding that we plebes dump our money into their particular hands and their financial acumen.
I used to listen to that, but I learned (almost too late) that there is a price for that “expertise.” It’s the Management Expense Ratio. Basically, it is the “cost” of running said fund including fees, escorts and coke, Porsches plus whatever else they want to charge you. And the worst part is they take their cut before you get your cut.
Your actual return in any fund can be expressed as a percentage = Fund’s Current Rate of Return% – MER%. Considering the shitty state of the world stock markets that Fund’s Current Rate of Return will more than likely be in negative terms. Remember: it does not matter if YOU don’t make money, the financial org will always get their cut.
You Ask: “So, Mr Writer of This Post, what does this all mean?”
Most actively managed funds don’t beat the market (usually the Standard & Poor 500 aka S&P500) year over year. The only ones that did were Ponzi Schemes like Bernie Madoff’s or Private Hedge Funds who require you to be rich as hell to join. Assuming you’re just a normal person, this means investing in a actively run mutual fund will have a very high (3-4%) MER (BTW, private hedge funds have an even higher MER.) Mathematically this means if you have a very good year and beat the market by 2-4%, your rate of return will be basically the market rate. So an “average” year means you’re going to make considerably less than the market rate. A bad time like the last two years means you’re losing a lot of extra money.
I’m just a plebe who wants a retirement (LOL) that won’t make me starve. I decided to put the meager funds of my RRSP into broad based index funds because they usually have very low MERs. This means I won’t beat the market because I bought into the market, but it also means I won’t make someone else rich at my expense.
However, the problem with index funds is that when the shit market hits the fan, it really hits the fan (like now.) You take the good, you take the bad, you take them both and there you have the (very basic) facts of the broad based index fund. Even if you don’t have money invested, this is just something to keep in mind when you do get some cash for investments.
PS: This is just one finance idiot’s opinion and please consult an actual financial professional before making any decision.
FYI, if The Donald actually invested his “$500” million worth in 1982 into S&P500 based index funds, the Donald by 2015 would have been an actual billionaire several times over. Forbes sez no, but Forbes estimates seem to be based on fantasy (cough Kanye cough the Kardashians cough.)