If you had any doubts that you could assemble a better fund portfolio than a fast-talking, high-paid, even well-meaning broker, put those fears to rest. Two new studies, highlighted in a recent Bankrate.com article by Barbara Whelehan, show that the do-it-yourself (DIY) crowd comes out ahead.
One study compared mutual fund returns for investors who assemble their own portfolios with those of investors who use brokers. On four of five measures, the do-it-yourselfers came out ahead.
- Brokers do find uncommon mutual funds, like newer or smaller funds, for their clients, including some that might not be easy to find or understand. However, they also tend to put a larger portion of their clients' assets in money market mutual funds (which, honestly, you probably don't need a broker to do for you).
- Brokers do not put their clients in low-cost funds. In fact, investors who used brokers were more likely to pay loads and higher operating and other expenses.
- Brokers do not pick funds with superior performance. Their chosen equity, bond, and money market funds lagged the competition when compared with funds sold by companies that interact directly with consumers. That added up to an annual cost to clients of $5.5 billion just for equity funds.
- The tendency for brokers to put more money in money market funds and other cash equivalents meant the DIYers had the edge in asset allocation.
- On one point, the competition between brokers and the DIYers ended in a draw. Both showed evidence of falling into the trap of chasing past performance.
The study generously remarked that brokers may offer other intangible benefits not measured by the study, but I'd guess that most investors are really after the tangible benefits.
The second study showed that investors who buy index funds through brokers pay substantially more than independent investors who buy their own no-load index funds.
You can do it
If you're a regular here, you know that The Motley Fool believes every investor is capable of managing his or her own money without paying brokers who have a strong self-interest in making you pay a lot of fees. Let these studies bolster your confidence.
If you're just getting started, low-cost broad-market index funds are a great place to consider putting your money (money that you don't need for the next five to seven years, of course). That'll put you in the position to cash in on broad returns of the stock market (historically about 8% to 9% per year).
With a broad-market-tracking index fund, one investment gives you instant exposure to the majority, or even the entirety, of the stock market. One excellent option is the Vanguard 500 Index Fund
A little extra spice
There are, of course, actively managed funds that cost little and have the power to supercharge your portfolio. One of Fool fund guru Shannon Zimmerman's favorites is Dodge & Cox International Stock
When you're hunting for great funds on your own, look for three things:
- No loads.
- Low expense ratios. The best-performing funds have lower expenses. As you search, use near (preferably below) 1% as a rough benchmark for actively managed funds and 0.25% for index funds.
- Long management tenure. Top funds have managers who have been in place for an average of nearly six years.
The Foolish takeaway
These two new studies show that you can succeed as a do-it-yourself investor. Not only can you do it, you can do better than these paid professionals.
Be smart and be disciplined -- and beat the pros!
If you'd like a cheat sheet of Shannon-endorsed fund recommendations, or for more on the nitty-gritty of do-it-yourself fund investing, click here for an all-access 30-day free trial to Champion Funds. Shannon's picks are beating their benchmarks by more than eight percentage points since inception in 2004.
Fool contributor Mary Dalrymple does not own stock in any company mentioned in this article, and she welcomes your feedback. GlaxoSmithKline is a Motley Fool Income Investor pick. Vodafone is an Inside Value choice. The Fool has a disclosure policy.
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