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Can mutual funds make you a millionaire?
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| Yes | 47% | 41 votes | Total: 87 votes | |
| No | 53% | 46 votes |
Yes
by Darren Robertson
Created on: October 31, 2010 Last Updated: November 04, 2010
Being a millionaire today has lost some lustre. Global economies are experiencing inflation, and the value of $1 today has very little purchasing power compared with the $1 of yesterdays. When we really think about it, any one of us could spend a million pretty easily. Recently in my hometown a business spent a million dollars on a three day "dream festival". By the time they paid for the speakers and threw a couple of really swanky private parties it became clear how they could have spent that money in a matter of three days.
Think of a mining operation - how quickly can they blow through a million dollars?
What proves to be more challenging is saving a million dollars. It seems impossible, but in actuality, it can - and continues - to be done.
Mutual funds can make someone a millionaire, but it takes years of dedicated saving and investing to achieve this. As a second generation mutual fund adviser, I have already seen clients who have saved and invested their way to a portfolio valued at over a million dollars. These clients come from all walks of life, but managed to put a couple of investing tools to work for them.
The first investing tool that can bring a mutual fund investor to a million dollar portfolio is compound interest. If someone invested $1000 for two years into a mutual fund and earned, as an example, a steady ten percent for two years, they would have $1000 X 10 percent for $1100 in the first year, and by the end of the second year they would have ($1100 + $1000) X 10 percent = $2310.
If you continued this calculation it wouldn't be difficult to figure out how to get to a million dollar portfolio. Now, over the lifetime of your portfolio you might not earn ten percent, but I used this as an example.
The other tool helping you along to a million dollar portfolio is the reinvestment of distributions. Companies often times offer their shareholders an income distribution in the form of shares. Mutual funds are no exception, they too receive distributions. Rather than take these distributions as income, they can be reinvested in the portfolio, allowing investors to purchase yet more shares.
If an individual continued to invest their money, reinvest their distributions, and take advantage of compound interest, then they could become a millionaire strictly through mutual funds.
Mutual funds could also help someone become a millionaire if they had other assets as well. Someone might own half a million in property and then build up a portfolio of mutual funds value at half a million. In a case like this, mutual funds help the person become a millionaire.
People do diversify their investment types. If you subscribe to the theory of multiple streams of income, then you can understand how people might hold various types of investments - real estate, stocks, mutual funds, etc. - to create a million dollar portfolio.
The key to remember when reaching for the million dollar mark is that you have to be patient, ride out the stock market turbulence, allow compound interest to work for you, and reinvest those distributions.
Then sit back, and enjoy your wealth.
Learn more about this author, Darren Robertson.
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No
by Daniel Cooper
Created on: October 31, 2011 Last Updated: May 04, 2012
People often ask the question, "Can mutual funds make you a millionaire?" Mutual funds do not give you a strong probability of becoming a millionaire, particularly when compared with ETFs, also known as exchange traded funds. The major problem with mutual funds is that they carry a very high management expense ratio, often referred to as an MER.
Although you can generate decent returns from many mutual funds, your probability of becoming a millionaire from them is diminished by this expense ratio.
Another reason mutual funds will not make you a millionaire is that they do not tend to generate high returns when compared to other asset classes like stocks and options. Because mutual funds tend to be professionally managed and are low risk, their upside tends to be less because there tends to be less of a return for a low risk investment, which is known as the risk/return trade off.
Those who ask can mutual funds make you a millionaire will be disappointed to know that you likely will not because they tend to be highly diversified. It is difficult to become a millionaire from such diversified investments because there will inevitably be winners and losers in your portfolio, which will moderate your portfolio's returns.
Unless you are extremely close to becoming a millionaire, it seems very unlikely that such an investment will generate sufficient returns to make you a millionaire.
This point is validated by the fact that the average mutual fund generated a return well below 10% last year. As a result, unless you had over $900,000 invested in a particular mutual fund, using a mutual fund to become a millionaire seems even more unlikely.
While I can understand someone's argument that over time, mutual funds can make you a millionaire if you consistently holding and reinvesting your dividends back into the mutual fund. However, many other investments, such as investing in high quality blue chip equities, bonds or treasury bills will give you a similar result.
This is very important to be mindful of when analyzing your investment alternatives and making sound financial decisions. In analyzing these alternatives, you will probably find that there are ETFs on the market which will give you nearly identical market exposure as a mutual fund but with a lower management expense ratio. This should be considered when you make an investment decision.
As I have mentioned, there is no doubt that you can earn some return from investing in mutual funds. However, it is not necessarily the best investment vehicle for someone who is looking to become rich or a millionaire. Hopefully, my argument presents you with some advice as to why an ETF is often a superior investment to a mutual fund.
Learn more about this author, Daniel Cooper.
Click here to send this author comments or questions.
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