Here is a tricky question; why would you buy something that is a pale copy of an original? Worst than that, why would you bother buying something that is obviously less performing and more expensive than an original? Well this is exactly what you are doing when you are purchasing mutual funds. Wait a minute… I do own mutual funds in my portfolio! Am I making a fool of myself and am I making sense? You need to read till the end of this post to find out!
Mutual funds are copycats
By definition, a mutual funds is a pool of stocks and other investment products that tries to replicate a specific market. So the questions that many people are asking is: ”why buying mutual funds when you can buy the index directly?”. ETF’s are cheaper than mutual funds and will most likely perform better than mutual funds in the long run.
However, mutual funds are offering several advantages.
The main one is that it will reduce the volatility of your portfolio. That will not do any good to your end of year yield, but it will surely help you sleep at night. Even better, smaller fluctuations may not encourage your to sell compare to what you would have been through with an ETF’s. Several people overestimate their risk tolerance. That usually happens until they lose a big chunk of money within a month 😉
Benefit from professional expertise
If you want to invest in emerging markets or overseas companies, you might want to refer your money to someone who knows what he is doing. Then again, ETF’s can do a pretty good job but will engage much more fluctuation. Don’t forget that it is still possible to beat the market with mutual funds. It is just tough to find those very rare fund managers (like Sprott for example ;-)).
In the end, if you think that you can live with high fluctuations and you are ready to do your research carefully, you are probably better off with ETF’s. On the other hand, mutual funds will bring two big advantages: less volatility and a chance to beat the market. I would say that it is also much easier to make a financial plan with a steady 7% (even though it can fluctuate between -8% to +15%) than variation in the range of -20% and + 40%. The most important thing is to get to your goal, not how you made it 😉
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