Funds Vs. Investing Yourself

Every investor has their own preferred investment. Two of the most popular choices are investing in funds such as ETF’s, Mutual Funds, or Hedge Funds, and self-investing using a strategy that you’ve either built yourself or adopted from a well-known investor. It’s finally time to figure out which choice has more potential.

To keep the whole process short we’ve taken a pool of random value investment funds and a pool of random value based screeners within Equities Lab and compared the returns.

The Funds

Using Fund visualizer, we compiled a list of funds that focus on value investments. You can browse around this site to know the list of funds we’ve compiled. Before we read into the chart too much, it is worth noting that these returns do not include any sales charges or maintenance fees that would be charged by your typical fund.

It appears that since 2006, all of these funds made a profit, with the majority of them returning between 50% and 150% over that time period. The highest performing fund gets you around 250% over that time period, which means that is the threshold that the screeners with the Equities Lab platform must beat.

Equities Lab

Here you have the example value based screens available within the Equities Lab platform. Seeing how the chart is a little difficult to read, every one of these strategies beat the S&P 500 since 2006. Our average range is between 150% and 300%.

Sadly, these results aren’t entirely accurate as you will be incurring brokerage fees when you enter or exit positions. Where a fund may take a percentage off the top in the form of a management fee, you will be stuck paying brokerage fees as you go. Let’s go ahead and add a trading cost of .25% to emulate those brokerage costs.

As expected, our returns took a hit. A few of the strategy’s returns were pushed below the S&P 500, but every strategy still makes money over the specified time period. Your average is still sitting in the 150% to 200% range so the average through self-management seems to be beating the funds average returns.

Time to Argue

At first glance it seems that investing your own money is the clear winner, but is this entirely true?

Firstly, you need to be aware that if you follow the exact same Quantitative strategy for a period of time it will eventually “go bust”. However, there are a multitude of screens that have gotten consistent performance within Equities Lab for over 20 years. There is no magical formula to market success, and the reason funds are moderately consistent in their returns is because they have teams of people constantly analyzing and building new strategies. That being said, they charge extra for this through fees and many times go bust themselves. Several John Hancock II value based funds have been discontinued and liquidated after only a few years. This of course doesn’t speak to the entire fund market, or even for their company, but it’s something to be aware of.

Honestly, it all comes down to your individual investment philosophy. There are funds out there that charge very low maintenance fees while allowing an investor with little capital to have access to a diversified portfolio. These funds allow you to take a completely hands off approach to investing where you just sit back, pay your fee, and hope that they make a return on your money in the long run. (Remember that you need to do just as much research before picking a fund as you do before picking a stock as not all funds are created equal.) On the other hand, if you’d rather take a more active approach to investing you may want to invest your own money and forego those fees by using tools to improve your chance of success. Let’s run a little cost experiment.

Let’s take the top performing fund in our random value sample – JMVNX Class C

JMVNX has a lower than average fee at .99% compared to the average value fund fees of about 1.22%. The fund is also no load. We are going to round to about the ten year mark in terms of fees, meaning you’ll pay roughly $3100 in fees over that time period to JMVNX with an initial investment of $25,000. Now, JMVNX has only been around since the beginning of 2009. If you invested $25,000 into JMVNX when they first opened their doors you would have turned that into just over $82,711 – Essentially keeping up with the S&P 500.

Chart by Morningstar net fees

Now let’s take a look at the flipside. Using the Value Across Time YRLY screen (The middle performing screen from above), we can backtest the strategy from 2009 and see the results. Note that the returns on the following chart have brokerage fees included.

You return a total of 370%, turning your $25,000 investment into $117,500 after brokerage fees. That being said, we are forgetting the cost of using Equities Lab which currently starts at $35/month – and totals out at $ 3,360 for the past 8 years, which you can click here to confirm. Note: We took the fee out at the end to make the mathematics a bit easier. This leaves you with a total account value of $114,140.

So, in the end a middle performing Equities Lab screen returned an extra $30,000 over the same time period for virtually the same price as investing in a no-load fund with below average maintenance costs.

Conclusion

So, should you go with investing in a mutual fund or go your own way? Honestly, I can’t give you an answer. In some cases investing in a mutual fund is better, and in others investing yourself while using the proper tools is the clear winner (like the example above). If I’m to get even more honest it just depends on how motivated you are. If you’d like to never think about your investments for any reason and trust that someone is handling it, you may want to go with the (possibly index) fund route. If you’re interested in learning and growing along with your investment portfolio it may be in your best interest to tackle self-investing head on for that reason alone, but I think the added returns are also a nice incentive.