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So I’m sitting on the edge of Lake Tahoe here, and I wanted to do a video for you, but I feel like having a little rant, and I know that’s weird, because I’m in this beautiful idyllic sort of location. But I had a conversation this morning with someone who I, I’ve met a couple of times before, and we were talking about their financial advisor and mutual fund managers.
And I want to just have a little moment about that. Because, if you use a fund manager, and you use a financial advisor, and you don’t manage your own money, you’re not trading your own money, I want to make sure that you understand the opportunity costs that you’re putting up with, or you’re taking on there. Because typically, a mutual fund manager will charge you about a 1% fee, 1% or so, to manage your capital.
Now that 1% is not a performance base. It’s for the privilege of you giving them your money to manage. Now they, they’ll make that 1%. They’ll take that 1% out of your account every single year, whether they make money or lose money. And if you have a good trading system that you can follow, that you’ve backtested, and you’ve got confidence in, it eliminates the need for that fee. Because you can manage your money yourself.
And the fund manager, I’m going to tell you, they don’t necessarily know how to train, invest and make money any better than you could, if you spend a little bit of time learning. But that fee, that 1% fee, compounds over time to a huge opportunity cost. You imagine, if every single year, you took 1% of your capital and gave it to someone else, and then they invested that money over the next 20 years, how much do you think they would end up with?
I mean, it’s an absolute fortune. And what gives me, what really gives me the shits about these fund managers, is when they invest, very rarely do they actually beat the market. I mean, most of them struggle to even match the market. And so you give someone 1% for the privilege of not even doing as well as the broader market.
I mean, you may as well just invest in an index fund, but you, I mean, absolutely you should, if you don’t want to lend to trade, you should be investing in index funds, instead of using mutual fund managers who actively trade the market. Because most of them will not beat the market.
But it’s way worse than that, too. Because most mutual funds, and index funds, their drawdown, their risk is way higher than you think, because those fund managers have to stay invested in the market. And an index fund is always 100% invested in the market. And so, when a catastrophic sort of financial event happens, like what happened in 2008, what sort of drawdown do you think you’re going to have in your account?
I mean, it’s like, probably, depending on what index you’re invested in, or what fund manager you’re with, it would have been 40, could have been 40%, 50% or more. And you know, you combine that sort of drawdown potential, with the fact that you’re paying a 1% fee every single year, just to give someone else your money to manage. And you end up doing far worse, than what you would, if you’re managing your own money.
Now, let me talk to you about fund managers particularly. Now most fund managers cannot beat the markets. Why is that? You know, they’re the professionals. They’ve got their teams of analysts, they should be able to, but they can’t. And there’s a structural reason for it.
The structural reason is that they can’t afford for you to take your money out of the fund. So they don’t want to look bad compared to all of the other fund managers. You think about it. If you’re an investor, and you are going to give your money to a fund manager, the only reason you’re going to take the money out of that fund is to give it to a better fund manager.
Now it’s not, and you’re not going to make that decision when your fund is doing well. You’re only going to make that decision if your fund does badly. And if the fund does badly, you’re going to be looking around to say, which fund manager is doing better than yours? And betterment is a relative sense. You know, if your fund is down 10%, and there’s another fund that’s down 5%, that fund, the other fund is looking pretty good, right? Because they only lost 5%.
So typically people look to switch funds when their fund manager does worse than other fund managers. This causes a phenomenon called clumping, performance is sort of comping and hurting, in fund performance. What they do is they all herd around the performance of the index, because they all try and match the index, and they go a little heavier or a little lighter on certain stocks, to try and get better, slightly better results.
And of course, we all know, that because of their cost base, they can’t outperform the market. But all fund managers tend to perform in a very similar band over the long term, because they can’t afford to diverge too much from the index. Because as soon as they diverged on the downside, they lose their assets under management. And then, if they lose their assets under management, they lose that 1% fee that you’re paying as the mutual fund investor.
So what’s the solution to all of this? The solution is to learn to trade and manage your money yourself. Now this is not for everyone, right? But if you’re technically inclined, if you’re fascinated by the markets, if you like the idea of trading, then you owe it to yourself to learn, because the opportunity costs of giving your money to someone else is just too high.
You can, of course, there’s no guarantees. But if you give your money to a fund manager, you’re almost guaranteed that in the long run, you’re going to underperform the market. And if you put your money in an index fund, you’re almost guaranteed, or you are guaranteed, in the long run, that you are only going to achieve the performance of the index. Now, I don’t know about you, but six, seven, 8% per year is not going to light me up.
It’s not going to get me excited, and it’s certainly not going to make you rich. So you need to do better than that. And the only way you’re going to do better than that is to develop a trading system, which can outperform the market, and which keeps your risk and your drawdown under control when the market turns down. Now again, there’s no guarantees that you’re going to outperform the market. I can’t do that.
But as a private trader, you have the potential to, whereas, with your money in a mutual fund, you’re almost guaranteed that you won’t ever outperform the market in the long run. And you’ll have drawdowns that are bigger, and you’ll pay fees for the privilege.
So you need to learn to trade, if you want to do better than that. If you want to stop paying those fees, and start actually making money, and start outperforming the market, the answer is to develop a trading system that you have confidence in, and following it.
So why does a trading system give you the chance to outperform the market? Well, there’s a couple of really clear reasons. The first one is, as a private trader with your own system, you can move in and out of the markets much more easily than a fund can. If you’ve got, if there’s a, if your money is in a fund that is, has tens of millions, or hundreds of millions or billions of dollars in it, that fund manager has to be very cautious about buying and selling different stocks, because every single move they make will move, will shift the stock price.
So they can only hold the most liquid stocks. They can only adjust their positions very, very slowly. But you as the private trader can hold small cap stocks that have much higher growth potential. You can also move in and out of stocks much more easily.
So if its stock is trending up, you can get into it. If it’s trending, if it stops trending up and it starts trending down, you can get out of it. You can manage your risk and keep momentum in your portfolio far more effectively enough than a fund can. And so, as a private trader, you got some massive advantages, but you’ve just got to learn how to be systematic about it. You know, developing a trading system, adopting a trading system that you have confidence in, is the key.
It’s the key to eliminating all of those fees, and it’s the key to outperforming the market, in terms of return. And it’s the key to managing your risk, and keeping your risk and drawdown a lower, less than, what the general broader market will incur. And if you look back in history, the broader market has massive drawdowns.
You know, 30%, 40%, 50%, 60% are quite common, in the grand scheme of things, if you’re going to trade or invest for the next couple of decades. And as a private trader, you can avoid that, and you can do better than that. You can manage your risk, keep your drawdown lower, because you can design your systems to do that. You can design your systems, and get out of a bear market, and to go to cash, or to go short and make money on the way down. Whereas most mutual funds just can’t do that.
And so, that’s your advantage, but you’ve got to step up and claim it. If you’re going to get money with someone else, and you’re fascinated by the markets, you’re interested in learning, and you just want to know, now’s the time. Don’t wait, because waiting brings even more opportunity costs. And you’re paying more fees. And you’ll walk up more time, more water under the bridge, that you could be compounding and growing your account.
So then, I’m going to challenge you. If you are interested and fascinated in the markets, and your money is sitting with a mutual fund, think very carefully about whether that’s the right thing for you. Now, if you’re keen to learn, and you want to develop a, understand how to create trading systems, or how to use trading systems to manage your wealth, and grow and build your wealth at a time, then click the link below and download my Trading System Confidence Cheat Sheet.
It’ll take you through the key steps and tests that I do on every set of trading rules, to give me absolute confidence that I can follow it, in a day after day, without second guessing it, without questioning it, without worrying about whether I’m doing the right thing, because I’ve built rock solid confidence in those trading rules.
So if that sounds like you, click the link below. Download my Trading System Confidence Cheat Sheet. My name’s Adrian Reid. This is my own stock trading. See you on the other side. Bye for now.