You have “abused investor syndrome” and don’t even know it.  Here’s what I mean:

You have been victimized so often by the securities industry, you don’t realize it’s not normal.  As a consequence, your investment judgment is seriously impaired.  Your returns are typically less than market returns, yet you continue to follow the same discredited practices, which include stock picking, market timing, and fund manager selection.

Nothing illustrates your helplessness and lack of objectivity more than your acceptance of a fee arrangement that makes absolutely no sense.  I doubt you would consider it in any other context.

It works this way:  In exchange for managing your money, you agree to pay a fee based on the total amount of your assets.  For example, let’s assume you invest $10,000 with an actively managed mutual fund directly and the fund charges 1% of the amount you invest.

The only reason you are buying this fund, rather than a fund that tracks the index it measures its performance against, is your belief (which the fund encourages) that it can beat the returns of this index.

If the fund doesn’t beat these returns, you still pay 1%.  If it does, you pay 1% on the amount invested, plus the increase in the value of your account.

Think about this arrangement.  You take all the risk.  The fund collects its 1% regardless of how it performs, although the amount of its fee will vary.

It gets worse.

You could have bought an index fund and, net of low expenses captured the returns of the benchmark index with certainty.  Why are you paying the mutual fund based on anything other than returns that beat the returns of a comparable index fund?  Why should you reward the mutual fund for equaling or even underperforming “no-brainer” index fund returns?

Here’s the most compelling reason why you’re an abused investor. The odds of an actively managed fund consistently and reliably beating the returns of a comparable index fund are extremely remote, especially over the long term and after taxes.

Now that you know the facts, it’s time to stop the cycle of abuse and start investing intelligently and responsibly.

Resource of the week:

This article summarizes all the fees (hidden and otherwise) often buried in the fine print of the mutual fund prospectus.  These fees reduce your returns.