What’s the Bottom Line?!

From 2020 to 2030, when the older baby boomers will be 64 to 74, America’s elderly are projected to face an income shortfall of at least $400 billion, including at least $45 billion in 2030 alone. This shortfall will affect every aspect of these retirees’ lives including their ability to provide adequate shelter, food, clothing and the basic necessities of life for themselves in their so-called “golden years”.

Many people believe that just blindly turning their life savings over to their bank, financial institution or financial advisor will produce the results they so desperately need to live their desired lifestyle as they age. This seems to be a very popular view with very contrasting results as many of these institutions choose to pour client investment capital into well diversified mutual funds.

However, one can find plenty of statistics that support the fact that approximately 75 to 80 percent of mutual funds under-perform the stock market returns in a typical year. Of course there is no such thing as a typical year and the real performance of funds varies greatly.

The average mutual fund return is 2 percent less than the average stock market return, yet despite this fact there are currently over $21 trillion dollars invested in mutual funds worldwide. In Stocks for the Long Run, Wharton School finance professor Jeremy Siegel shows that the actual percentage of mutual funds to outperform the S&P 500 has varied between 10% and 85% in individual years between 1972 and 2000. Nevertheless, he notes, between 1982 and 2000, there have been only three years in which more than half of mutual funds have beaten the Wilshire 5000, an unmanaged index which includes all publicly traded stocks headquartered in the U.S. and holds over 7,000 stocks.

Mind you, even the most professional stock traders have trouble predicting such a volatile market as demonstrated by a Swedish newspaper that gave $1,250 each to five stock analysts and a chimpanzee named Ola. Their goal was to test who could make the most money on the market in a one month period. Ola the chimp, who made his choice of purchases by simply throwing darts at a board containing the names of companies listed on the Stockholm exchange, won the competition. No, he is not for hire.

Over a period of 25 years, if Canadian and American mutual fund returns were the same before fees (let’s assume they are 10 percent), an initial investment of $1,000 would grow to $7,800 in an American fund but only $5,800 in a Canadian fund. The average Canadian investor can lose nearly 40 percent of their profit in fees over a 20-year period. A mere 14 percent of Canadian equity funds outperformed the S&P/TSX index and 25 percent of U.S. equity funds outperformed the S&P 500 index over a five year period.

Bottom line? People need to start taking responsibility for their own investment portfolios and create a team that will help them make wise choices to achieve their retirement goals.

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