This post was originally made on Jul 13, 2006 on a former blog of mine.

Repeat after me. I cannot control stock market returns. I cannot control bond yields. I cannot control daily price fluctuations. I cannot control the whims of man that cause market manias. I cannot control fear or greed or ignorance. After one puts his money to work there is very little one can control in the world of investing. One of the few things you can control that is directly related to your return is the amount of fees you pay in obtaining it.

I came across this article by BusinessWeek yesterday entitled Mutual Funds: Back in Action. It’s basically an article extolling the virtues of Mutts and how people have gradually begun to send more money to them over the last several years. Some of the figures are startling. Mutual Funds presently hold about $9.5 TRILLION dollars in assets. The article also states that they charge 0.93% management fees on average. If you do a little math you will soon realize that means the mutual fund industry takes in just over $88 BILLION per year in management fees. That’s roughly $300 per man, woman, and child in this country. Yikes.

So, the funds are making their fees and that is all fine and dandy. That doesn’t mean you have to contribute to them any more than you have to. To me, minimizing the fees you incur in any investment is the key to long term success. If you invest for long durations of time, the theories say you will eventually receive the long run expected return of the mix of assets you hold. That does not, however, include fees, taxes, and transaction costs in the model.

I can hear my financial advisor peers cringing as I write about fee minimization but they should not fear. It is not the fee of the fee-based investment advisor I am knocking here. After all, those guys give you way more than you bargained for in the way of advice on retirement, education, taxes, insurance, estate planning, and any number of other things. They also serve as your voice of reason when you think you are becoming financially insane because you watch the ticker too much.

No, what I am saying here is that one should do his best to control what he can control. Namely - the fees which he pays to mutual fund companies to provide him with his investments. I, for one, believe that a portfolio of ETFs and individual stocks (and some other assets for diversification sake) can be created that will give you a better risk and return profile than a portfolio made up exclusively of mutual funds. Now, that’s not to say that type of portfolio will work for everyone. In fact, there are times when the account is so large that buying a slightly illiquid ETF might not be wise. There are numerous variables to consider, I just prefer to lower fees wherever possible.

By now, anyone who has been reading this site for long knows I have a bias against mutual funds. That bias doesn’t really stem from any particular bad “feeling” about them. To put some lipstick on the pig I think they are acceptable insofar as they encourage people to save who otherwise would not. My bias comes from my highly technical and mathematical analysis of long term returns and just how big a role fees play in ones success there. As my esteemed colleague Shawn Meade of Niagara Financial, reminds me, mutual funds help lots of investors take the emotion out of investing. If emotion trumps ones ability to make rational decisions (and it many times does) then mutual funds may be the way to go. Otherwise, I believe there are much better ways to tackle the optimal portfolio problem than simply buying 10-15 mutual funds.

This article has probably left many of you with more questions than answers but I assure you I will be addressing many of them in future articles.

“You will become as small as your controlling desire; as great as your dominant aspiration.” -James Allen

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