8 Tips For Successful Investing

Tip Number 1: Look at the SAI of the mutual funds you own. 

The SEC requires each mutual fund company to issue a prospectus.  This document reveals vital information about the investment that all investors should know.  One problem with it, however, is that consumers and advisers are led to believe that the expenses reflected in the prospectus comprise all the expenses, and this is simply not true.  If fact, the typical prospectus reflects only about half of the fund’s total costs.  To find the other half, you have to read the Statement of Additional Information (SAI).  In the SAI you will find details about the trading costs incurred by the fund.  This trading is often referred to active management.

Active management is the attempt of either an individual or a money manager to try to out-perform the stock market rates of return by actively trading individual stocks and/or engaging in market timing – predicting when to be invested (in the market) or not be invested (out of the market.)

In order for active mutual fund managers to beat the market, they must perform better than their comparative benchmark.  For example, a large cap mutual fund would be compared to the S&P 500 index.  Because they are attempting to beat the index they are going to incur some additional fees in this attempt.    In order to beat their benchmark, they must include any fees, trading costs, and/or taxes associated with this.  Active management creates undisclosed fees to investors called transaction costs and bid/ask spreads.  There have actually been studies done to show investors what this active management costs investors.  On average, it costs investors an additional 1.50% per year.1

The trading costs are in addition to the fund’s management expense ratio (MER,) found in the funds prospectus.  The MER typically includes management fees, 12b-1 fees, and other expenses deducted from fund assets or charged to investors accounts (U.S. Securities and Exchange Commission 2000.)  The average MER for  active mutual funds is 1.35% per year, which together with an average trading cost of 1.50%, renders a total annual fund cost of 2.85% per year for the average active mutual fund.2

Ken French of Dartmouth’s Tuck School of Business estimates that investors collectively spent $102 billion per year in trying to achieve above-market rates of return.3

To find the fees in the SAI you have to read through the entire document, around 400 pages, to find the numbers, add them up yourself, and divide the total by the number of outstanding shares (found in the prospectus.)  This is how you determine the costs per share.  This enables you to compare the SAI costs to the “annual expense ratio.”   This is a time-consuming process and is one of the reasons why people hire us instead of trying to analyze mutual funds for themselves.

If you are one of the many Americans that are looking for answers about how the securities industry works, then you are going to love the free report Mark has put together for you titled “8 Tips For Successful Investing.”  You will learn little known secrets about investing such as:

  • Does Market Timing Really Work?
  • Can Anyone Really Pick the Best Stocks in Advance?
  • Does Your Funds Track Record Performance Really Help You Predict the Future Returns?
  • How much are You Really Paying for Professional Advice that You May Not Know About?
  • PLUS: The “big secret” of what’s killing the return in your portfolio?

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