Sunday, December 27, 2009

How to Outpace Most Mutual Funds and Hedge Funds while Earning a Fee

In spite of all their efforts, the majority of players in the stock market – be they mutual funds, hedge funds, or individual investors – are unable to keep up with the market averages. There are generic as well as distinct reasons among the participants for lagging the marketplace.

On the upside, though, there’s a simple way to outshine the mass of punters in the stock market. In fact, the objective is not that formidable or even taxing.

A raft of studies over the decades has shown that mutual funds as a group trail behind the stock market at large. Although the exact numbers vary somewhat from one probe to another, a representative result is that the annual return from mutual funds is on average half percent lower than the benchmarks of the bourse.

One reason for the shortfall is that mutual funds have a habit of charging a maintenance fee based on the total value of the assets under management. In the past, the fee has ranged anywhere up to a couple of percent – or even higher – of the average value of the portfolio over the course of the year.

In a raft of ways, the performance of hedge funds is even worse than that of mutual funds. According to impartial studies, the top tier of hedge funds ekes out a gross profit that is comparable to the average performance of mutual funds.

Even so, the net return to the investors is a lot less for a several reasons. One factor lies in the performance fee, which usually ranges from 20 to 50 percent of the gains whenever the portfolio happens to turn in a profit. Moreover, the investors have to pay a fixed fee – usually a couple of percent of the average value of the portfolio over the course of the years – for administrative expenses regardless of performance.

In spite of the pitfalls, a lot of investors squander their money on investment funds that levy a fixed fee of a couple of percent each year for holding onto their assets. The customers could easily secure better results through cost-effective pools that charge a pittance for their services.

Another curio is that the average investor earns even less than the average mutual fund. The crux of the problem springs from the habit of giving in to alternating bouts of mania and panic.

If you were to keep up with the stock market at large, then you’d be trouncing the average fund managed by the professional managers. It goes without saying that you’ll also trump the mass of individual investors by a comfortable margin.

In fact, you could also pay yourself a management fee of nearly half a percent a year on the total value of your portfolio. In that case, you would of course trail behind the indexes of the stock market by a similar amount. Even so, you could still beat the bulk of your rivals whether in the form of mutual funds, hedge funds, or lone investors.

This article will show you how to achieve this fabulous feat.

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