Mutual fund managers fail to Beat their Benchmark….

by brendon on May 6, 2011

To implement great investment advice and follow independent financial plans means you can also measure its success. Investing in broadly diversified portfolios designed to deliver market rates of return with reduced risk will help you to know your expected rate of return, volatility measures and worst/best case return years for the asset classes you’re invested into.

Do you know the expected rate of return for your current investments? Can your investment advisor or financial planner in Kansas City tell you this answer?

Most advisors and financial planners will tell you to own mutual funds—I would too. However—the management of the actual fund and what’s inside the fund is more important than just owning a bunch of mutual funds.

History reveals that the majority of mutual fund managers that actively trade inside the fund FAIL to beat the benchmark the mutual fund is most similar to. This activity is referred to as “turnover ratio”. Studies reveal the average equity fund can expect an internal trading expense of approximately 1.5%. This is a hidden cost you may not be considering or even knew was there. It is in addition to the published expense ratio and can lower your expected rate of return and increase risk measurements. (Refer to Mutual Fund Trading Costs Go Unreported-WSJ.com)

Dan Goldie and Gordan Murray authors of The Investment Answer book include this enlightening chart about active managers failing to beat their benchmark.

What’s the solution to improving your rates or return?

First find out if your current investments are ACTIVELY managed. Chances are they are. Second, know what asset classes your investments include-you’re probably missing entire classes and not capturing those rates of return. Then, find an advisor who’ll give you access to broadly diversified portfolios that capture market rates of return with LOW TURNOVER.

Educate yourself, understand what market rates of return are and capture them with proven investment strategies.

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