January 31, 2012 | In: General

Why Stocks Are Better than Mutual Funds

Many bank advisers tell you the complete opposite of what the title of this article states. They tell you that mutual funds are better than stocks, and they use the following myths as arguments:

Myth #1: Mutual funds are safer than stocks: Bank advisers use this as the first strategy to lure first time investors who are afraid of risking their money in the open market. They tell them that mutual funds are safer than stock trading, that the potential of loss is minimal when compared to stock trading and the chance of making moderate money with a mutual fund investment is really high. What they don’t say is that a mutual fund consists of a group of stocks, either in the same industry or in diversified industries, and that many mutual funds lose, and some lose big, like 20%/year.

Myth #2: Your are in control in your money when you’re investing in mutual funds: This is the biggest lie ever, you’re in control of nothing when you invest in mutual funds. In fact, the fund manager (who manages your fund as well as thousands of other funds) is the one in control of this fund. He’s responsible for choosing the stocks that will constitute your fund, and he shuffles the contribution of each stock in the fund (he may also remove/add stocks) depending on the market. You do nothing, you just login to your mutual fund account every day and see how much money you’ve won or lost every day. Just a quick note here, the fund manager couldn’t care less about your money – the only reason he wants you to make money is because he wants to look good and get more money from the bank as a bonus. Another thing to mention is that fund managers rarely, if every, invest in the mutual fund they create/control.

Myth #3: You can make a lot of money with mutual funds, almost as much as stocks: Another big lie, show me a fund (other than gold funds) that made a decent amount of money last year. All mutual funds, if they make money, make anything between 0.1% and 5%, which means that for a very successful mutual fund, you’re only breaking even with the inflation rate.

Myth #4: Mutual funds are flexible: Bank advisers tell you that it’s easy to switch from one mutual fund to another. Now of course, you would probably believe that, but once you really want to move from one fund to another, then expect a total delay of at least 2 weeks to do that. You will first need to sell, the money will take a week to return to your bank account, then you will have to buy, and the process of buying will most likely take at least another week. Also note that you will be charged a redemption fee (another way banks can steal money from you) if you decide to sell your mutual fund within 30 days of purchase. That redemption fee is around 2%. So, let’s say you invest $10,000 in a mutual fund, and then a couple of weeks later you decide you do not want it, you will lose 2% of your investment, which is around $200 (the decision to leave the fund become especially hard when you’re losing money on the fund). I don’t see that as flexible.

Myth #5: Mutual funds are guaranteed investments: Some (not all) bank advisers claim that a mutual fund is backed by the government in case something really bad happens and you lose all your money invested in this fund. This is a lie! Mutual funds are not guaranteed as no government in the world would guarantee securities.

Myth #6: Mutual funds are taxed less than stocks: Another big myth used to lure investors into buying mutual funds instead of investing in the stock market. The reason why bank advisers say that mutual funds are taxed less is because most people invest in mutual funds for at least a year (making them pay the least amount of taxes on capital gains, see this article on taxation on capital gains). Taxes on mutual funds are no lower and no higher than those on stocks, they are exactly the same.

Myth #7: Mutual funds are not stressful: Mutual funds are even more stressful than stock trading in my opinion, because there is nothing you can do when you see your mutual fund losing money day after day after day. If you’re trading stocks, you can sell a portion, you can buy puts, you can buy more shares of the same stock to even your losses and maximize your profits when the stock rebounds – the opportunities are endless!

Myth #8: Mutual funds carry no fees: As I explained above, there are fees associated with closing/transferring a mutual fund account. Additionally, some banks make you pay some fees in order to open a mutual fund account.

Myth #9: There is no minimum for investing in a mutual fund: Every bank forces a minimum for investing in mutual funds, that minimum can range from $100 to $10,000 – depending on the bank and the fund.

Myth #10: You get to keep all the gains for yourself: For me this is the biggest drawback in a mutual fund. Let me tell you something that you most likely don’t know about mutual funds. Each fund carries a management fee that you don’t pay directly. The management fee is a percentage of the whole fund that will go to the fund manager and the issuing bank. The better the fund manager, the higher the fee is. The management fee can be as high as 5%. So, let’s say, for example, that your mutual fund made a raw profit of 4% and your management fee is 5%. This means that you will lose 1% on your mutual fund, because in order for you to make money in the fund, the fund has to make something above 5%.

Now, here’s why stocks are better than mutual funds:

Fact #1: Stocks are only unsafe for those who like to gamble: If you do the necessary due diligence on the company before purchasing shares of its stock, then most likely you won’t lose any money. If you just make a random guess or if you’re blindly following a trend, then be prepared to lose a lot of money.

Fact #2: You, and only you, are in control of your stock portfolio: Unlike mutual funds, you can sell/buy stocks whenever you want. If you think that you have made enough money on a stock, then you can sell it and search for a bargain stock to make more money with.

Fact #3: You can make an infinite amount of money on stocks: If you always make the right move (buy on time/sell on time), and if you’re patient, non greedy, and non fearful, then you should make a lot of money on stocks. Some investors quadruple their capital every year.

Fact #4: Stock trading is flexible: In addition to what is mentioned in Fact #2 (buy/sell any stock at any time), the money is immediately available to you to re-invest when you buy/sell shares. Also, you can get out of the stock market whenever you want, at no fees! You just take your gains (or losses) and that’s it – no questions asked!

Fact #5: Stocks are not a guaranteed investment: But why care? Why should the government fund your investment endeavors? This is a free market and you should enjoy it as it is. Government presence and intervention in any market is bad!

Fact #6: Taxes on stock gains are not as much as you think: Most people think that taxes on capital gains are something like 50%. In fact, taxes on capital gains can be even less than taxes on their own (the people’s) income taxes. Not only that, if you don’t make a lot of money then you don’t pay any taxes on your capital gains, and if you hold your shares for more than a year, then you are capped at a maximum of 15% taxes regardless of the amount of money you make.

Fact #7: Stock trading is stressful: There is no denying it, stock trading can be very stressful, but it’s also fun! And, you get to feel like you’re an important person, and it’ll change something in you. You’ll be able to take risks in your life. Whether these risks is positive or negative is another story, but you’ll still be able to take risks to advance your life. What is life without risks?

Fact #8: There are no hidden fees in stock trading: All the fees when you trade stocks are communicated to you before your first trade, and you don’t pay a penny other than these fees. What’s even more interesting is that the more trades you make, the less you pay in fees as you will be considered an active trader (here’s a comparison of active trader programs in Canadian banks in case you want to lean more about the subject).

Fact #9: There is no minimum for trading stocks: However, be advised that starting with anything less than $5,000 is not a great idea as bank commissions/fees will eat most of your profits. So, the minimum amount to trade stocks with is $5,000.

Fact #10: You really do get to keep all money for yourself: If a stock goes up 5%, then you will make 5%, and not 0%. If a stock goes down 1%, then you will only lose 1%, and not 6%. The money that you make in stock trading is yours, all yours. (Of course, you still have to pay taxes on it, but, as mentioned before, taxes on capital gains are very reasonable).

This article (as well as all other articles on this website) is an intellectual property and copyright of Fadi El-Eter and can only appear on fadi.el-eter.com.

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