Why Haven’t Your Mutual Funds Made You Rich?

Monday, April 7th, 2008 | Investment, Money, Real Estate, Statistics | 3 Comments

I hear, just like most of you, that you can put your money in a good mutual fund and watch it grow at 12% a year. The only thing about that is I have never really seen that happen to me. Then as I looked around I noticed that I didn’t see it happen to many others either. So, as inquisitive as I can be sometimes, I started looking around.

I went to a New York Life presentation where they said that the average net gain for a mutual fund investor was less that 3% if you adjusted for inflation. New York Life probably wants the numbers to look like their investments were better. So I doubted their entire premise. But me being me, I started looking for verifying reliable information. Wow! Did I find a great place to see that actual numbers. Here is the link – (www.CrestmontResearch.com) – You will need to take your time when you go there. This site has more facts put into graphs than you might expect and they don’t seem to have an agenda. My favorite graph is at http://www.crestmontresearch.com/content/Matrix%20Options.htm.

I chose the “Stock Index Only” chart to give the benefit of the doubt to those claims of 12% return. Looking at the last 10 years the average stock market increase is no where near 12%. The unique way the graph is designed you can see what the annual return for money deposited from a given year until 2007. The money you deposited in the stock market from 1996 until 2007 returned 7% annually,

1997 – 2007 – 5%,
1998 – 2007 – 3%,
1999 – 2007 – 1%,
2000 – 2007 – 0%,
2001 – 2007 – 4%,
2002 – 2007 – 8%,
2003 – 2007 – 11%,
2004 – 2007 – 9%,
2005 – 2007 – 10%,
2006 – 2007 – 13%.

Since only one year average was at or above 12%, why expect 12%? The years from 1986 – 1995 gave a 9% annual return. Not only that, but INFLATION, FEES and TAXES are not figured in the calculations! This really isn’t a BAD investment if your employer matches your deposits. But it sure isn’t the “safe retirement” fund that I hear touted by all the gurus.

9% annual return
25% of the 9% for state and fed tax -2.25%
3.5% inflation and fees
9% – 2.25 – 3.5 = 3.25% annual return cash in pocket

Let’s figure you put $3,000 year away which means that with 3.25% return that year’s deposit gives $3,097.50. Using the same calculation multiply it by the 20 years $3,000 in and 20 years out, $4,195. Even if you do some significant compounding, the net – net is not going to provide a wonderful quality of life because the annual returns are just too low.

If you are like most of us, your mutual funds just took a significant decrease in value since December 2007. You are probably looking and another very low return year at best. Maybe you might want to get a little more proactive with the money that is supposed to keep you in your later years.

Tags: Investment, mutual funds, Phoenix real estate investing, returns on stock market