You may find the number appalling.
- Hedge fund and mutual fund managers make money by imposing fees on investors.
- If you’re looking for a more hands-off way to grow your money, look to low-cost exchange-traded funds.
Some people are comfortable with the idea of investing. They’re not nervous to load up their brokerage accounts with different stocks, and they know what it takes to analyze a business and decide if it’s a good buy or not.
But not everyone has those skills. And even if you work to educate yourself on how to vet a business, you might still lack the confidence to hand-pick stocks for your portfolio. That’s where different types of investment funds come in.
When you invest your money in a fund of any sort, you’re basically not making investment decisions yourself (other than your fund of choice). Rather, you’re taking a hands-off approach to building your portfolio, which may be a less stressful route for you to take.
There’s absolutely nothing wrong with investing in different funds rather than assembling a portfolio of stocks you’ve chosen yourself. Many people go this route and enjoy a lot of success.
But you’ll need to be careful with the type of fund you choose. In some cases, choosing the wrong type of fund could mean losing an almost unbelievable amount of money to fees.
How much money are you willing to give up?
The problem with investment fees is that they can really eat away at your returns and limit your ability to grow long-term wealth. A recent tweet by Market Sentiment told the story of someone who, at age 25, gave a hedge fund manager $100,000 to invest, and that manager delivered an annual return of 8%.
Assuming a 1.5% management fee and a 20% performance fee, that person would’ve had $764,000 by age 65. But the fund manager would’ve collected $1.24 million — without having to invest their own money.
That’s why hedge funds aren’t necessarily a great choice for everyday investors. And to be clear, often, they aren’t even a choice. That’s because it’s common for hedge funds to impose a large minimum investment requirement.
In some cases, it may be $100,000. In others, it might be $1 million. But either way, if you invest with a hedge fund, you should expect to pay a lot of fees. And that’s money you could be keeping for yourself.
Now while hedge funds often have a large investment minimum, mutual funds can be more attainable for everyday investors. But that doesn’t automatically make them a great choice, either.
Mutual funds employ fund managers to develop strategies and hand-pick investments. Those fund managers need to be paid. And the way they get paid is by imposing high fees on investors like you.
A better type of fund to invest in
If you’re not looking to hand-pick stocks for your investment portfolio, consider putting your money into exchange-traded funds, or ETFs. When you buy ETFs, you’re effectively buying a bucket of different stocks with a single investment.
Because these funds are passively managed, you generally will not be looking at the same fees you might pay with a mutual fund. And you can bet you won’t be paying the often-exorbitant fees that hedge funds tend to charge.
As an example, you may decide to put money into an S&P 500 ETF — a fund that will aim to match the performance of the S&P 500 index, which consists of the 500 largest publicly traded stocks. In that case, you might pay a fraction of the fee a mutual fund might charge you — all the while getting a comparable return. And this way, you won’t have to worry about choosing the right stocks, because you’re putting your money into 500 large, established companies.
Hedge funds can make a lot of sense for very wealthy investors. And even if you’re not in that category, mutual funds could be a good fit for you. But it also pays to look at ETFs if your goal is to grow a nice amount of wealth in a hands-off fashion without having hefty fees eat away at your returns.
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