We’re going to play a game today…
It’s based on the TV game show, Let’s Make a Deal.
I’ll present you with a deal, and you decide if you’ll take it.
Ready? OK, here’s the deal:
Send me $10,000, and over the next few years, I’ll invest it for you.
In return, you’ll pay me $1,000—even if I don’t make any money for you, and even if I lose you money.
On top of that, if I do make you some money, I’ll keep 80% of your profits.
So, do we have a deal?
Deal or No Deal?
I bet I can guess your answer:
No way would I take a deal like that!
But here’s the thing:
You’re probably making a deal like this every day—you’re just not aware of it.
You see, if you’ve been investing for a while, I’m guessing you have a diversified portfolio. You might own some stocks, some bonds, some REITs…
And I’m also willing to bet that you own some mutual funds.
I say that because according to a survey from the Investment Company Institute, in 2016, roughly 43% of all U.S. households owned at least one mutual fund. That makes mutual funds one of the most widely-held asset classes in the country.
Unfortunately, if you own a mutual fund, you’re basically making the same terrible deal I proposed to you above.
Let me explain…
All of the Profits, None of the Risk
You’re probably familiar with many of the big mutual fund managers: Fidelity, Vanguard, T. Rowe Price, etc.
These companies manage trillions of dollars in investors’ assets, and they earn billions of dollars each year by managing those assets.
But they don’t earn all that money because they’re great investors. Far from it actually…
According to a report from The Financial Times, 99% of actively managed U.S. equity funds underperform the overall market.
How do these fund managers earn billions each year even though they don’t beat the S&P?
I mean, if those billions aren’t coming from investment returns, where are they coming from?
Answer: your wallet!
You see, these funds invest your money, they deliver below average returns, and then they charge you outrageous fees.
And these fees add up. In fact, they can basically eat up 77% of your profits!
Don’t believe me? Here’s an excerpt from Tony Robbins’ new book MONEY: Master the Game, where he’s having a conversation with the 85-year-old investment guru, Jack Bogle:
“Tony, it’s simple,” said Jack. “Most people don’t do the math, and the fees are hidden. Try this: If you made a onetime investment of $10,000 at age twenty, and, assuming 7% annual growth over time, you would have $574,464 by the time you’re nearly my age [eighty]. But, if you paid 2.5% in total management fees and other expenses, your ending account balance would only be $140,274 over the same period.”
“Let’s see if we’ve got this straight,” said Tony. “You provided all the capital, you took all the risk, you got to keep $140,274, but you gave up $439,190 to an active manager!?”
“Exactly,” said Jack.
The Scariest Part
Most people don’t even know this “theft” is happening.
You see, through employer-sponsored retirement plans like 401(k)s, millions of investors are mutual fund owners without even knowing it.
In fact, according to the Investment Company Institute survey I mentioned above, 81% of all mutual fund owners hold their shares through their 401(k) plans.
And by doing so, they’ve unknowingly made a terrible deal—one that could put their retirement plans in jeopardy.
How to Avoid This Scam
To be clear, not all mutual fund companies are out to rob you—and funds are a good way to gain diversification.
So if you invest in funds but want to avoid making a bad deal, here’s what to do:
1. If possible, enroll in a self-directed 401(k). This will give you more control over how your savings are invested.
2. Stay away from actively managed funds! Between their high fees and poor performance, you should be avoiding these funds like the plague.
3. Instead, look for low-cost “index” funds that match the broad market. Here are a few of our favorites: the SPDR S&P 500 ETF (SPDR), the Vanguard 500 Index Fund (VOO), or the Vanguard 500 Index Fund Investor Class (VFINX).
Another Retirement Savings Trap
You may have noticed that Matt and I have been writing about retirement planning quite a bit lately.
For example, yesterday Matt showed you why you can’t count on Social Security to help fund your retirement.
And today, I showed you how the outrageous fees from mutual funds could be putting your retirement plans at risk.
The reason we’re writing about this topic is simple:
Our primary focus at Crowdability is on early-stage investing, because if you have a little time and a little capital, it’s a great way to capture some of the highest returns the market offers.
But we understand that you might also have more pressing needs related to your retirement.
That’s why we broadened our article topics, and that’s why we recently launched a new service called Income Unlimited.
Income Unlimited is designed to help you live a more comfortable and secure retirement…
Unlike early-stage investing where you generally need to wait months or even years to realize a profit, Income Unlimited provides unconventional investment ideas that can help you generate big gains, immediately.
Unfortunately, membership for this new service filled up quickly and is now closed. We put a 500-member limit in place when we first launched the service because many of the investments we recommend are in small, private opportunities. (Our concern was that opportunities would fill up too quickly and leave some members out in the cold.)
However, after observing the performance of these investments, we’ve started to discuss the possibility of increasing membership by a very small number in the future.
If you’re interested in learning more—and in being notified if we decide to increase the membership—click here now to add your name to the Income Unlimited Early-Access Waitlist »