2 things you MUST know about investment funds

2 things you MUST know about investment funds

You are walking up a mountain path and you come across a wise man. He says to you, give me some of your food and water and I will help you to the top. You oblige and share what you have. After he has eaten his fill, he takes a large boulder, places it upon your back and walks away shouting “You’re welcome!”.

 

If this actually happened to you… how would you feel? Think about it. You would not be pleased…

 

He took almost all your food, and now you’re stuck with a useless boulder on your back!

 

This little analogy is, in fact, happening to most of you, and has been happening for quite a long time.

 

What I am talking about is the use of high-fee, actively managed funds within Superannuation.

 

Very simply, there are two types of funds that you can invest your money with.

 

The first is called an Actively managed fund. It works under the premise that you pay a fund manager an annual fee that is usually between 1-2% in the expectation that for that money they apply their diligence and skill to your money which means it outperforms the market.

 

The second is called a Passively managed fund or Index fund. It takes an index, like the ASX 200 for example and simply holds the index. It doesn’t try to outperform the market, it just holds the entire market and so gets the market return. Index funds are far cheaper, generally ranging between 0.05 – 0.25%.

 

With some actively managed funds being 40 times more expensive than a passive fund, that is the difference between paying $4 and $160 for a coffee.

 

Now I can see what you’re thinking. It makes sense that you should pay more for a better job. But that is exactly what is isn’t happening with the actively managed fund. You are paying up to 40 times more for a fund which is expected to underperform relative to the market.

 

A study completed between 1984 to 1998 by Vanguard found that only 8 out of 200 actively managed funds beat the Vanguard 500 Index, a passively managed fund. That is a 96% failure rate!

 

If I were to give you those odds what would you do? Let’s imagine a game where we have a gigantic 100-sided die and I say to you. “Let’s roll the die. If the numbers 1 to 4 come up, you win. If the numbers 5 to 100 come up, you lose. But no matter which number comes up you have to pay me to play” I have a 100% chance of winning and you have a 96% of losing. It’s a case of heads I win, tails you lose. Would you play that game with me?

 

Of course not. You would walk away

 

You wouldn’t make that bet with $5, $10, $100, or $1000.

 

But right now, you’re probably making that bet with your super. That bundle of money that you can’t touch and might not fully understand isn’t just some obscure concept or number. It’s your freedom. It’s your Piña Colada on the beach. The Ford Mustang you always wanted. A retirement without financial worries and night sweats.

 

If that makes you uncomfortable, then act. You have to take the first step. No one can do it for you.

 

Please note that your personal circumstances have not been taken into consideration in the construction of this article, thus please do not construe it as personal advice.

 

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