I Will Teach You To Be Rich: No guilt, no excuses - just a 6-week programme that works

by Ramit Sethi

You see, mutual funds use something called “active management”. This means a portfolio manager actively tries to pick the best stocks and give you the best return. Sounds good, right? But even with all the fancy analysts and technology they employ, portfolio managers still make fundamentally human mistakes, like selling too quickly, trading too much and making rash guesses. These fund managers trade frequently so they can show short-term results to their shareholders and prove they’re doing something – anything! – to earn your money. Not only do they usually fail to beat the market, but they charge a fee to do this. Mutual funds typically charge 1% to 2% of assets managed each year. (This percentage is known as a fund’s expense ratio.) In other words, with a 2% expense ratio and a £10,000 portfolio, you’d pay £200 per year in fees. Some funds even tack on additional sales charges, or “loads”, to the purchase price (a front-end load) or sales price (back-end load) of the fund. These are just some of the tricky ways mutual fund managers make money whether they perform or not.