This could very well blow your mind ...
Stock mutual funds hold more than $6 trillion in assets. That's enough cold hard cash to build a land bridge to Asia.
OK, maybe that's a stretch
But if you think $6 trillion is a lot of money to be invested in stocks, consider that there's another $5.1 trillion invested in bonds and money market funds. It's less, sure, but it's still a full 46% of the total.
In other words, American investors have a lot of money invested -- and that money seems to be invested far too conservatively.
Yes, those numbers are a quick and dirty way to arrive at that conclusion. But -- and it's a big "but" -- to our way of thinking here at The Motley Fool, investors with a timeline of 10 years or more should be holding no more than 10% of their investable assets in bonds -- let alone anything in money markets.
And yet, clearly, we do ...
Dumb and dumber-er?
American investors aren't dumb. We're uninformed -- a reason for the mad rush of money into professionally managed mutual funds since 1996. Fund assets under management have increased nearly 11% annually over the past decade, as the number of funds available for investment has increased from 6,293 to 8,726, according to the Investment Company Institute.
And fund companies are cashing in. Fidelity Select Brokerage (FSLBX) -- a sector-tracking fund that counts Credit Suisse (NYSE: CS), Jefferies Group (NYSE: JEF), and Bank of New York (NYSE: BK) among its holdings -- is up 9.4% annually over the past 10 years. That's nearly six percentage points ahead of the S&P 500 index.
Pay up for ... junk
Of course, the majority of the funds out there fail to beat or even match their benchmarks, despite holding some solid stocks. Take John Hancock Growth Trends (JGTBX), for example. The fund has been walloped by the S&P 500 to the tune of more than four percentage points per year over the past five years. What's more, positions in Microsoft (Nasdaq: MSFT), Citigroup, and AIG (NYSE: AIG) have the fund already trailing the index by more than six percentage points year to date.
But poor stock picking isn't the only reason the fund's customers are underserved. They're also paying the fund's managers an absurd 2.22% expense ratio -- which means investors are starting out 2.22% in the hole. That's a big hurdle to overcome.
And while the fund's managers probably love cashing their fat checks, your payments to them are preventing you from doing the same!
We pay you to what?
The Investment Company Institute recently broke down the workforces at these fund companies by job function. Would it shock you to discover that just 31% of the folks working in this enormous and profitable industry are truly dedicated to picking and researching investment opportunities?
In other words, 69% more are not.
And while some of these excess workers perform critical functions, such as ensuring regulatory compliance, another good chunk are focused on sales and marketing. But why draw a distinction? Your absurd fees pay for all of them.
Cut the fat. Pick your own stocks.
Is it a big step? Yes. Is it an impossible one? Heck, no. Here are three time-tested tips to get started:
- Only invest money that you won't need for at least three to five years.
- Keep investing money regularly, and never try to time the market's machinations.
- Diversify your portfolio broadly enough so that a few bad surprises won't ruin your returns.
Of course, that's only the tip of the iceberg.
Make it happen
But if you'd like to learn more about valuing and picking your own stocks, consider joining our Motley Fool Stock Advisor investing service. There, Fool co-founders David and Tom Gardner bring you regular interviews and investment lessons from top business leaders, keep you up to date on breaking market news, and help answer your questions on the service's dedicated discussion boards.
And here's the best part: They also pick two stocks each month that they claim will beat the market for the next decade or more. Since inception in 2002, those picks are beating the market by 37 percentage points on average. You can see each and every one of them by trying out the service free for 30 days. Click for more information. There is no obligation to subscribe.
This article was first published July 23, 2007. It has been updated.
Tim Hanson does not own shares of any company mentioned. Microsoft is a Motley Fool Inside Value pick. The Fool's disclosure policy is disappointed that it was never asked to be an FM 94.9 Insider DJ and requests that Garrett bring it back.
