Mutual fund numbers surprising
One of our heroes at Fool HQ is John Bogle, founder of the Vanguard Group and father of the index fund (which we’ve long recommended for most investors). In the Financial Analysts Journal, Bogle shared some thoughts on how the mutual fund industry has changed over the past 60 years.
Here are some eye-opening statistics he shared:
•There were just 68 or so funds 60 years ago, compared with more than 8,000 today. That’s roughly the equivalent of one fund per stock that exists.
•Speculation has become rampant. Managers of yore would hold on to stocks for years, while these days it’s often months. “Indeed, between 1945 and 1965, annual portfolio turnover averaged a steady 17 percent, suggesting that the average fund held its average stock for about six years. … Fund managers now turn their portfolios over at an average rate of 110 percent annually.”
•In 1945, shareholders tended to hold on for a long time — typically around 16 years. Today, a typical holding period is more like three or four years.
•Fund costs have increased. The average expense ratio (an annual fee) for the largest funds in 1945 was 0.76 percent; it’s now 1.56 percent. Bogle notes: “In other words, while their assets were rising 3,600-fold, costs were rising 6,600-fold.”
•Between 1983 and 2003, the stock market’s average annual return was 13 percent, while the average stock mutual fund’s return was just 10.3 percent.
So what should you do? Consider forgoing managed mutual funds and sticking with simple index funds that track indexes such as the S&P 500 or the total stock market. Their fees tend to be considerably lower, and they have, for many decades, outperformed the majority of managed equity funds. Index funds let you closely match the stock market’s average return.
If you want to do better, identify the relatively few funds with long, outstanding track records and promising futures. Study up at www.morningstar.com, and take advantage of a free trial of our Motley Fool Champion Funds newsletter, at www.championfunds.fool.com. It even features an interview with John Bogle.
Ask the Fool
Q: When I purchase a share of stock in a company, what am I buying? I see that the company gets its money when the stock is issued, but after that, what does the company get out of it when I buy a share on the open market? — B.F., Bradenton, Fla.
A: A share of stock represents a (small) chunk of a real company. If a firm has a million shares outstanding and you buy 100 of them, you own one ten-thousandth of the company. The company does get its money at the one-time issuance of the share, but as shares fluctuate in the open market, companies do care how they fare. A falling stock can make it easier for the firm to get bought out. A rising stock can help insiders with stock or stock options get richer.
Q: I have only $5,000 to invest, so I’m looking for stocks under $5. Where should I look? — C.Y., Gary, Ind.
A: First off, you’re wrong to think that you need to find “cheap” stocks. You may buy 1,000 shares of stock for $1 each, only to see them fall in value, while you alternatively might have bought 100 shares of a $50 stock that doubles in a few years. The price alone doesn’t tell you much. A $300 stock might look pricey, but if the company’s shares are really worth $500 each, it’s a bargain.
Consider steering clear of “penny stocks,” those trading for less than $5 each. Often volatile and extra-risky, they may be more likely to fail than flourish. Too many people fall for them, getting excited at the thought of owning thousands of shares and not realizing that many 50-cent stocks become 10-cent ones.
My dumbest investment
My first foray into investing was a stock tip from a friend. I studied the charts, saw a pattern of up and down, and decided I could double my money in two weeks, which I did. Emboldened, I looked around for my next ticker to easy money. I found my next hot tip — WorldCom — in a magazine and jumped right in, borrowing money on margin from my brokerage and even using one of those demonic credit-card cash-advance checks. Man, this investing stuff is easy! Month after month I held, watching my portfolio shrink and debts grow. I’ve finally paid off all that debt and am cautiously testing the stock market waters again, but now with the benefit of hard-earned experience. This time I’ve taken out a second mortgage on my house to short the builders for $40,000 based on a great tip from AM radio. Just kidding! — S.B., Boulder, Colo.
The Fool Responds: Hot tips, studying charts and patterns, credit card advances, borrowing on margin — ay, caramba! You packed a lot of painful lessons into a short period, but you should fare better from now on.