Investing in Mutual Funds

Every month I make an automatic contribution to my RRSP – it consists of mutual funds, right now, but I’m wondering if there is a better way to invest?

Mutual funds offer a convenient way to invest because they comprise a basket of different stocks, bonds and other financial instruments – all packaged together so that you don’t have to do any thinking.

The great thing is, you get instant diversification which consequently decreases your risk, and you can also start investing with as little as $25 per month.

But I have to wonder if this convenience comes at a cost?

What I’ve been noticing is this little fee being deducted from my account on a periodic basis – mutual funds charge a management fee to run the fund. This is the cost of running getting a pre-made investment vehicle.

These fees can be up to 2% or more of your portfolio value – on $10,000 that’s $200! This can start to add up if you factor these fees over a long period of time. But, you DO have to pay people to make the decisions …

Another issue that is starting to bother me is lack of control because someone else is making the selections for you. The only power I have over a fund is the initial choice. Once I’ve done my research and purchase my fund, the only thing to do is to watch the price and hope it keeps going up. Not sure that ‘hoping’ is a good investment strategy.

With stocks you can protect yourself but there is a caveat: it requires much more knowledge and sophistication on the part of the investor. Plus, there are instruments available that can be used to ‘protect’ your portfolio.

An investor who knows what they are doing can trade options to help protect the value of their portfolio. For a price, options allow you to buy or sell a security at a pre-determined price for a certain period of time. I find this level of control very appealing – you cannot buy options for mutual funds (for the most part)

Another great advantage to stocks is I can easily control which ones I have by simply buying the good ones and selling the not-so-good ones.

Of course, trading directly in stocks requires more effort and knowledge so there would be homework to do. I would have to embark on a path of total financial education.

So I’ve made a decision – being the control-freak I am, I think I will eventually dump the mutual funds and covert my RRSP to one that is self-directed. I’ll definitely have to spend more time educating myself and there still are fees to pay, but I will have much more control over the performance of my portfolio (Of course, this could be good or bad!)

Therein lies the dilemma – let someone else do the work or do the work yourself?

Letting some else do the work will result in paying management fees and losing some control whereas, going self-directed means more work and possibly more risk if you don’t know what you’re doing

I think it comes down to your own comfort level and aversion to risk and your spare time.

Take a look at your own portfolio and life – it may be time to go self-directed and do the work yourself!