One Quick Way to Recoup 80% of Your Investing Profits

The Investment Company Institute reports that nearly half of American households own a mutual fund.

It's encouraging to see so many households investing, but it's a shame because as many as 78% to 95% of mutual funds fail to beat the market. Even worse, as John Bogle writes, fund management fees snag up to 80% of the remaining profits your hard-earned money gained over a 40-year investing span.

This means that the one move you can make today to recoup 80% of your investing profits is to drop your mutual funds and reclaim the management of your own portfolio. It might seem a daunting task, but just ahead, I'll tell you exactly how to do so, and still sleep at night.

Trying to win a losing battle
Investing in mutual funds means always operating at a disadvantage. The expenses set you back from the get-go (currently the average annual expense for a stock fund is 1%). What's worse is that as your money in the fund grows, those fees stay at that fixed percentage.

It doesn't seem like much with a small balance, but as your portfolio grows, it starts to add up. On a $250,000 portfolio, a mutual fund would take $2,500 each year -- whether or not the fund managers even grow your money! After capital gains or dividend taxes, you can see why John Bogle has said about the industry, "The scandal is not what's illegal. It's what's legal."

But as my colleague Paul "The Boss" Elliott writes, it's not just fees that get you -- it's the whole way the show is run. Managers are constrained by the "style" of their fund (meaning they can be diversified within a style, yet undiversified overall), and often just try to mirror the index (meaning most aren't contrarian enough to pick the hidden or unpopular winners). So taking control of your portfolio for yourself is not only a cheaper option, but it's also an opportunity to construct a more diverse portfolio.

Diversity ain't what it used to be
When investors talk about diversity, they often speak of market caps and sectors. But a portfolio not only needs diversity of size and shape, it also needs to take advantage of opportunities abroad.

In fact, that's why Motley Fool co-founder and CEO Tom Gardner recently picked international investing expert Tim Hanson to join his team at his real-money Motley Fool Million Dollar Portfolio. Tim has logged extensive air miles traveling the world in search of investment ideas -- and now he's consulting the real-money team Tom Gardner recruited two years ago, as they begin to ramp up their international exposure.

There are four major global trends he's plugged into right now that you can profit from:

  1. Protecting against the dollar's decline. The dollar is set up for depreciation against other global currencies. But rather than speculate in gold and other commodities, he's recommending investors get exposure to global juggernauts like Philip Morris International (NYSE: PM  ) , Diageo (NYSE: DEO  ) , and Unilever (NYSE: UL  ) , which operate in a wide range of countries, and not just companies like Starbucks (Nasdaq: SBUX  ) and Best Buy (NYSE: BBY  ) , which largely target well-to-do customers.
  2. Profiting from emerging infrastructure. China, India, Brazil, and a host of other up-and-coming countries are finally joining the technological age with "reliable nationwide power grids and wireless communications networks." Companies like ABB (NYSE: ABB  ) stand to benefit from this.
  3. Protecting against the China-Latin America trade block. China is sidestepping the U.S.'s dominance and heading straight to Latin America for trade and resources. This move undercuts the dominance of the U.S., but companies like Creditcorp and Bladex are poised to profit.
  4. Profit from the rise of rural China. Tim calls this the "real growth engine" in China, as non-city-dwellers step into the modern era. Most investors are either unfamiliar or uncomfortable with this niche, but Tim's convinced that companies like China Mobile (NYSE: CHL  ) and Yongye International are the way to cash in on this trend.

I'd be careless if I didn't state that this is just one aspect of the market-beating Motley Fool Million Dollar Portfolio. In fact, the service has a team of six top equity analysts who select stocks from diverse styles -- value, growth, small cap, international, and dividends -- with former hedge fund manager Ron Gross heading up the charge. The service is just about to reopen its doors for the first time in over a year!

If you're ready to take charge of managing your own globally diverse portfolio by mirroring a portfolio that The Motley Fool has its own money behind, I invite you to click here. We'll let you know exactly when the service is opening and how to become a part of this exclusive community. Happy investing!

Adam J. Wiederman owns no shares of the companies mentioned above. Best Buy and Starbucks are Motley Fool Stock Advisor picks. Best Buy is a Motley Fool Inside Value selection. Diageo and Unilever are Motley Fool Income Investor picks. Philip Morris International, ABB, and Unilever are Motley Fool Global Gains picks. The Fool owns shares of Best Buy and Starbucks. The Fool's disclosure policy is outlined here.


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  • Report this Comment On November 10, 2009, at 8:45 PM, sesameball wrote:

    the prospectus gross expense ratio for the motley fool freedom fund is north of 2%..am i missing something?

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