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Mutual Funds: The Great Liars

Updated: Feb 25, 2019


In the previous blog post (Dividends: to Reinvest or Not?), we discussed dividends: what they are and how reinvesting them can lead to some serious gains for your nest egg. Dividends are any investors best friend. They can be a great source of passive income later on down the line ONLY if you keep an eye on your fees! If you're invested in Low-cost Index Funds then you will retain more of your dividend income, however, if invested in Mutual Funds (Which I'm not sure why you are if you're reading this blog) then most of your dividend income will be confiscated. More on this in a bit.


Over the last several decades, Dividends per share have increased. Exhibit 1 below shows increasing Dividends per share given out by the S&P 500 over a 90 year period from 1926 to 2016.

Exhibit 1

Over the 90 year period, despite some ups and downs, there has been an overall upward trend in Dividends per share paid by the companies of the S&P 500. That's a good thing for investors. We want more dividend income, just like we want Santa to come home every year with more gifts for the kids.


Unfortunately, "Mutual fund managers give dividend income a low priority:"Jack Bogle. Mutual funds are actively managed funds. Since managers promise their clients to beat the market a majority of the dividend income that should be passed on to the investor unfortunately gets eaten up by fees. With certain mutual funds, 100% OF DIVIDEND INCOME GETS EATEN UP BY FEES!! WTF!?!?! Don't believe me? Let's take a look at the table below taken from Jack Bogle's book "The Little Book of Common Sense Investing."

Exhibit 2

Exhibit 1 to the left is a table showcasing Dividend Yields and Fund Expenses for two different types of funds: Actively managed Mutual Funds and Low-Cost Index funds. Circled in Red we see that 100% of the dividends are consumed by fees for actively managed Growth Funds (A growth fund is a fund whose portfolio is made up of companies whose stock prices or valuation managers believe will increase in the future. "Growth" companies, as a result, provide low dividend yields.) For Value Funds (Companies that managers deem undervalued by the stock market relative to the company's dividend yield, sales, and earnings) 58% of the dividend income was consumed by fees. The fees that we pay mutual funds hurt us in more ways than one. They not only eat up our long-term profits, which we learned in the blog post "Index Funds", but they also eat up our dividend income!!!! That's like being a good boy or girl for a whole year and Santa gives you nothing! Zero, ziltch, nada...WTF Santa!?!?

Exhibit 3

Exhibit 2 on the left shows how fees from a low-cost index fund impact investor's dividend yields. Circled in green, low-cost index funds that focus on growth companies only lose 4% of dividend income to fees and low cost value funds lose only 2% in fees. That means the investors, (Us!) get to keep 96-98% of the dividend income, which we can cash out or reinvest. That is a huge deal!! That 96-98% in dividend income could be the difference between sitting on several millions of dollars in retirement or a few hundred thousand dollars. And remember, when you invest YOUR money, YOU area taking 100% of the risk because YOU are putting in 100% of the cash. These fund managers put in nothing! So when it's all said and done, YOU should be walking away with a majority of the profits.


Mutual funds are the layman investors worst enemy. The fees and false promises can kill the growth of our nest egg in the long run. And the worst part is: layman investors are totally unaware they're losing more than half their wealth in fees because fund managers will never disclose this information to their clients. And why would they?!?! Their job is to take advantage of our ignorance. They fill the pages with complex language and complex tools that are impossible for any main street investor to understand and then we're left with no other possibility than to give them our money because we feel they are better suited to making informed decisions. I mean they do have diplomas and certificates from schools signifying their excellence in investing. But, once again, if we come to understand the fine print, and do the work to understand these basic common sense concepts, we, as main street investors, can do a lot of good for our long-term financial future. We can put the power back in our hands and use it to build our wealth on our own, cut the "Helpers" out, and keep more of our money.

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