Big red sold sign

Why I sold my mutual fund and don’t regret it

The novice (that’s me) makes his first investment

My first legal act after my eighteenth birthday was to open a retirement account.

If you’re familiar with me, you’ll remember that I grew up on welfare and became interested in money as a teenager. I didn’t want to be in the same position my parents were in, so a week before I turned eighteen I was on my way down to my credit union, determined to take my first steps.

When I got there, I asked to talk with someone about retirement planning, but I ended up having to wait a few days. The credit union didn’t have someone on staff to handle retirement planning at my branch, so they had someone come down from another location to meet with me.

Initially, I was extremely risk adverse, and terrified of the idea of losing any of my money. Call me poor, but I was poor, and I didn’t want to lose what I had.

After all, I had slaved away at a pizza shop for that money.

white piggy bank on desk

The financial planner told me that I was probably better off being aggressive with my investments and explained that I had, in all likelihood, forty or more years until retirement. I thought he might be trying to pull a fast one on me, but I eventually agreed to purchase the mutual fund he recommended in a Roth IRA account.

Since then I’ve learned that, no, he wasn’t trying to scam me out of my money by recommending I take an aggressive approach.

He was just dealing with one paranoid eighteen-year-old who had never invested in his life.

The mutual fund from hell

See that heading?

That was a joke.

The mutual fund I ended up buying in my Roth was called the Growth Fund of America and was offered by American Funds.

At the time, a share of the fund was trading for about $25. I invested an opening contribution of $350 and scheduled regular contributions of $100 a month for a few months.

I ended up contributing another $400 before I halted my contributions.

I was going to be out of town for a few months and didn’t know what my income would look like, so I decided I was better off waiting until I was back to make additional contributions.

It turned out that I never ended up making another contribution. Eighteen-year-olds aren’t known for their consistency. Go figure.

How long I held it

I ended up buying a few shares here and there through a taxable account over the next couple years, but I never bothered to pay much attention to my Roth until the fall of 2014. Around that time I started following the stock market again and was excited about the idea of getting started with regular investing.

Part of that was because the shares I’d bought through my taxable account had gone up 182.52%, and I wanted more of the action. I was motivated and a little greedy.

I finally scrounged up the log-in information for my Roth and looked at how it was doing.

Since I invested my initial $750, my shares had appreciated to about $46.70 a share, or an increase of around 73.94%. Not bad, right?

I wasn’t upset with what my mutual fund’s performance, but I realized that there were a lot of stocks on the market that had performed much better than that, while paying a dividend.

Despite how well it had done, I wasn’t sure if I was really getting my money’s worth.

After all, I opened my Roth in the spring of 2010. That 73.94% was really 21.13% annually. Call me arrogant, but I wondered if I could have gotten a better return myself.

Well, I knew I could, because my taxable account had returned 73% annually since I had started investing.

Comparing my mutual fund to individual shares

I started to get the idea that I might be better off managing my money, instead of paying someone else to do it for me, so I started comparing my Roth to shares I was thinking about buying.

I decided I would act as if I had bought the shares in September of 2011 since that was when I opened my taxable account. When I compared how my mutual fund had done to stocks on the market, it came up short more often than not.

But the straw that broke the camel’s back was when I compared it to Wells Fargo.

If I had sold my mutual fund and bought Wells Fargo stock in September of 2011 I would have been able to buy 27 shares of Wells Fargo and I would have been buying in at $23.69.

From then until September 2014, the shares would have appreciated 118.02% to $51.55 a share. In addition, I would have collected $85.05 in dividends.

By letting someone else handle my investments I had lost out on about $306.23 in capital appreciation and dividends.

I was done. No one else was going to manage my money.

I sold my shares and emptied my Roth.

(And then I had to pay $85 when I filed my taxes.)

What I bought when I sold

As soon as the money cleared through my bank account I transferred it into my taxable brokerage account. I had been looking at a couple different stocks, but eventually, I decided to buy GE.

I’ll admit, I didn’t do any in depth technical analysis of the stock. Instead, I read through several news articles about GE and the direction Jeff Immelt was taking the company. I also looked at new initiatives and products they were launching. I was inexperienced, but I liked what I saw.

But the biggest factor that led to me buying shares of GE was their price and GE’s dividend payment. At the time, shares were trading for about $26 dollars a share and paying a $0.23 dividend per share.

As someone who was almost completely new to the idea of dividend investing it sounded like a great deal to me. I bought 42 shares and sat back.

How things have turned out

So how have things turned out for me?

That depends on when you ask me.

GE has been a bit of a wild ride for the last three years. Initially, it tanked down to the $23 range right after I bought it, before jumping up when they sold GE Capital.

Since then, it’s mostly been a slow climb upwards, flirting with the low 30’s in terms of value. At times last year, I was looking at paper profits of about $200 on my fairly small holding, but this year has been miserable. GE has posted an incredible 19.13% decline this year, and I’m now back in the red for my initial purchase.

And how’s my old mutual fund turned out?

Since September 2014 it’s returned an incredible 5.55%.

Yeah, that’s right. A solid 1.85% annually.

I’m no mathematician, but that’s better than GE has done for me over the same time.

Looks like I’m a fool.

Well, sort of. Until you look at dividends.

I’ve collected $107.10 in dividends since I bought GE, which is $44.94 greater than what my gain would have been if I had kept my mutual fund.

And that’s a big reason I decided I would be better off managing my own money instead of paying someone else to do it. My mutual fund, in addition to charging me an annual management fee, keeps all the dividends they receive from their holdings.

I decided that if I was going to be invested in the market and my money was going to be producing dividends, I should be the one to receive them, not the managers at my mutual fund.

And it’s exactly those dividends that have been responsible for out-performing my mutual fund, even with GE’s 19% decline this year. That’s only going to be truer now that I’ve started a DRIP, which I hadn’t been doing until January this year.

Closing thoughts on mutual funds

I’ll be frank. After my experience with one, I’m not a big fan of mutual funds, but I think they can be great options for some investors.

In particular, I do like low-cost dividend paying index funds, and that’s what I recommend to most of my family and friends when they ask me what they should invest in.

But for me, they’re not right, at least right now. I do plan on buying an index fund through my company’s 401k plan when I start working, but most of my money will probably remain self-managed.

I like the idea of being responsible for my own investment decisions. If I lose money I’ll only have myself to blame, and I won’t have anyone else to be mad at. If I make money, I won’t have to share any profits with a manager or other investors.

For me, self-managing has worked well, but a large part of that is that I’m a buy and hold investor. When my investments start losing money, I stop looking at my brokerage account for a couple of weeks. Inevitably they go back up.

I’m in this for the long haul, not the short-term. As long as that’s the case, I’ll be buying individual stocks.

What are your thoughts?

4 thoughts to “Why I sold my mutual fund and don’t regret it”

  1. I’m unsure why, knowing about mutual funds, you would still choose to go the “stock-picking” path. The results are clear: investing in mutual funds/stock picking offers you a 1-2% chance to outperform the typical index fund. It will be even a smaller percentage as time continues and stock pickers won’t be able to keep up. (Check out J. Bogle’s “The Little Book of Common Sense Investing”)

    The likeliness of getting better returns is, in my opinion, not worth the extra stress, effort, and time.

    The best of luck to you! I’ve enjoyed reading a few of your articles.

    McKenzie

  2. Funds vs individual stocks. This conversation comes up often. I agree with you that individual stocks are the way to go. Funds make good sense for a passive investor. As an active one, I like researching companies, it helps me stay on top of market conditions. I also like collecting dividends and DRIP investing. Lastly, and honestly the most important reason for me, is that I sell options against the stocks I own. This extra income offsets and potential gains I’d see in fund performance over individual stocks. Good for you for doing what you think is right.

  3. Thanks for sharing your experience. I don’t think I would be doing the same thing or otherwise if I am in the situation. They say it is just paper loss and it will come right back up. I’m pretty sure it will, after a few years then same thing will happen it will eventually decline. I guess, it is a good thing you did what you think is the best for your funds. I also heard that it is best to follow your gut when it comes to investments. Good for you.

    1. Yeah, unfortunately, time has proven me the fool on this one. In retrospect, I should have done more due diligence before picking GE. Jeff Immelt was…a poor manager, and the signs where there for those who looked closely enough. Thankfully, my other investments have been more successful.

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