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What Is the Average Mutual Fund Return on Investment? – NextAdvisor

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Mutual funds are one of the most popular investment vehicles on the market thanks to their diversification, which means your money is spread out among hundreds or thousands of companies. This protects your investments from any downturns in the market, which helps you build wealth. Instead of investing in individual stocks, mutual funds allow you to easily invest in the entire stock market — or just one sector — by investing in just one mutual fund. And with only a few mutual funds, you could build a well-diversified portfolio with multiple asset classes and a broad market exposure.

But you might be wondering, as you would for any other investment, what kind of return you can expect with mutual fund investing. Experts agree that investing is the key to building wealth, but just like any investment, there are risks. Mutual funds tend to outweigh most of the risks because of their diversification. We spoke with a couple of finance industry experts to learn what the average return is for mutual funds, as well as how those returns compare to other types of investments.

Average Returns for Mutual Funds

There are more than 7,500 mutual funds that span different sizes, investment styles, sectors, and more. As a result, it would be impossible to pin down a so-called “normal” or average return that would apply to every mutual fund. Instead, the return you can expect depends on the type of mutual fund you’re investing in.

“When people talk about ‘average returns’ they are normally referring to a certain benchmark like the S&P 500 Index,” said Ryan Ortega, a financial advisor and the founder of Third Line Financial Planning in Los Angeles.

According to the U.S. Securities and Exchange Commission, the stock market has an average historical return of about 10% per year. However, that only tells what type of return you might expect if you invested in a total market mutual fund. 

When you add other types of mutual funds into the mix, the average return may look very different. After all, some mutual funds are made up of fixed-income assets with historically lower returns than the stock market. On the other hand, you might also have a mutual fund filled with small-cap stocks, which are known for greater volatility but higher growth potential.

Average returns also differ from active to passive funds. A passive fund — also known as an index fund — is one that tracks the performance of a particular index. An active fund, on the other hand, has a fund manager that actively manages it and chooses the investments. Historically, passive funds tend to outperform active ones consistently, especially over longer time horizons.

Ultimately, there’s no one average return we can apply to all mutual funds. Instead, it’s important to consider your required return — meaning the return you would need to achieve your financial goals — and the type of funds you’re invested in.

“One issue that we run into is we’ll read different articles and see different number quotes,” Ortega said. “We might see that the stock market has returned 8% over the years.”

But according to Ortega, it isn’t enough to simply compare that benchmark number to your portfolio and if your portfolio falls short, assume you’ve done something wrong.

“First, we have to understand the timeframe where that number is coming from. What start date are they using? Understand if that number is looking at stocks and bonds or only bonds. Then when you compare it to your portfolio, you can look at what assets your portfolio is holding compared to that benchmark.”

Average Returns by Sector 

As we mentioned, one of the factors that influence mutual fund returns is the sector they’re invested in. Some mutual funds incorporate all 11 stock market sectors, while others may focus on just one.

Over any given timeframe, the returns of one sector can differ significantly from the returns of another. For example, according to data from the S&P Dow Jones Indices, in the 12 months preceding February 2022, the energy sector had the highest returns, with an annual average of 53.67%. On the other hand, the communications services sector had an average annual return of negative 3.64%. 

Had you only invested in one of these sectors, your portfolio would have either performed really well or really poorly. However, we can never know ahead of time which sectors will perform well. As a result, financial experts generally recommend a diversified portfolio that includes exposure to all sectors so you can take advantage of large gains while somewhat insulating yourself from the effects of large losses.

Pro Tip

If you’re just getting started with investing, consider opting for a target-date mutual fund or one that tracks the total stock market. You’ll have broad market exposure and a portfolio that keeps pace with the market, which can help you build wealth.

Mutual Fund Returns vs. Individual Stocks

Many investors choose to invest in individual stocks instead of mutual funds, but many experts disagree with this financial move. When we look at individual stocks, it becomes even more difficult to identify an average return. Just like the different sectors we discussed, some stocks will outperform the market, while others will drastically underperform.

One of the benefits of investing in mutual funds is you get many of the benefits of investing in individual stocks. But instead of buying just one or a few individual stocks, you’re buying hundreds or thousands. You get the benefit of those stocks that match or outperform the market. And at the same time, those stocks that underperform don’t make up enough of your portfolio to do any real damage. This is why diversification is so important.

It’s also important to note that mutual funds offer more exposure not only in the number of stocks in your portfolio but also in other assets. When you build your portfolio with individual stocks, you only have equity exposure, and as a result, are likely to see your portfolio take a major hit when the stock market is down.

But a more diversified mutual fund portfolio might also include bonds, commodities, and more. As a result, when the stock market is down, you might have investments that are performing better and can help to alleviate some of the volatility in your portfolio.

Mutual Fund Returns vs. ETFs 

Mutual funds and exchange-traded funds (ETFs) are similar in that they are both pooled investments that hold a large number of underlying assets. They can either track the performance of a particular index or be managed by a professional fund manager.

The key difference between mutual funds and ETFs is the way they trade. An ETF trades in a similar way as a stock, while trades on a mutual fund work a bit differently.

“One significant difference between mutual funds and ETFs is that while mutual funds trade only once a day at the end of the day, ETFs trade throughout the day,” said Dann Ryan, a CFP and the founder of Sincerus Advisory. “So while this means you get one price a day on a mutual fund, you get many for an ETF.”

When you decide to invest in a particular index, you’ll often find both mutual funds and ETFs for that index. For example, there are S&P 500 mutual funds and ETFs, and they both hold the same underlying assets. 

The biggest difference in your returns when you have a similar mutual fund and ETF is likely to come down to the fees. For example, Vanguard’s S&P 500 mutual fund has an expense ratio of 0.04%, while it’s S&P 500 ETF has an expense ratio of 0.03%. The difference between the two is so minimal you’ll barely notice it in your returns. But if you had expense ratios that were significantly further apart, the difference between your returns would also be larger.

Additionally, as we mentioned, both mutual funds and ETFs can be either active or passive, and each fund has its own strategy and prospectus. If you’re going to compare the returns of a mutual fund to those of an ETF, be sure you’re comparing funds with a similar asset allocation.

Mutual Fund Returns vs. Hedge Funds

A hedge fund is an investment vehicle used by wealthy individuals where they pool their money together to invest in higher-risk opportunities.

While the goal of a mutual fund is often to match the returns of the stock market, the goal of hedge funds is to beat it. However, in exchange for those higher potential rewards, investors must also accept above-average risk. As a result, hedge fund investments are generally only available to accredited investors, meaning those with high incomes or high net worths.

Just like individual stocks and sectors, investing in hedge funds offers little predictability. In any given year, you’ll likely have some hedge funds that drastically outperform the market and others that drastically underperform. And at the start of the year, you won’t know which is which.

When considering adding mutual funds or hedge funds to your portfolio, it’s likely not an either-or decision. Instead, experts generally recommend allocating the majority of your portfolio to diversified investments like mutual funds, while leaving just a small portion for speculative investments, which could include hedge funds or other types of investments like cryptocurrency.

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German Hydrogen Utility HH2E Wins Investment From UK Firms – BNN

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(Bloomberg) — London-based private equity company Foresight Group Holdings Ltd. and investment firm HydrogenOne Capital Growth Plc acquired stakes in HH2E AG and will help the new hydrogen company to develop green energy projects in Germany. 

Foresight and HydrogenOne have taken minority equity stakes in HH2E and agreed to co-invest in energy projects, the German company said in a statement on Monday. HH2E — co-founded by Andreas Schierenbeck, former chief executive officer at utility Uniper — plans 2.7 billion euros ($2.8 billion) of investment to build 4 gigawatts of green hydrogen and green heat-production capacity by 2030. 

“Germany has one of the largest industrial and manufacturing sectors in the world,”  said Schierenbeck. “Leaders in these sectors know they must secure the supply of energy, control energy costs, and find low- or zero-carbon solutions soon. HH2E will be producing green hydrogen located close to the industries that need it.”

Germany aims to get almost 100% of its electricity from renewables by 2035, and is racing to expand green energy capacities as it tries to pivot away from reliance on Russian natural gas. The country plans to install 10 gigawatts of electrolyzer capacity by 2030 to scale up the hydrogen market. 

Russia’s Invasion Supercharges Push to Make a New Green Fuel

The two British investment companies will provide most of the capital needed for HH2E’s first five green hydrogen projects, which will need a total of 500 million euros in development costs and have an initial capacity of 500 megawatts. Some of them have the potential to be expanded to 1 gigawatt, according to Schierenbeck. 

HH2E seeks to produce green hydrogen cheaper than grey hydrogen — made from natural gas — in the coming years. It is “clear that the economics of green hydrogen are better than the grey and blue, as the latter two depend heavily on the cost of natural gas and carbon,” said Schierenbeck.

“This financing agreement enables a massive acceleration of our development plans,” said HH2E co-founder Mark Page. 

©2022 Bloomberg L.P.

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It's an ideal time for adopting the Number One defensive investing strategy for retirees – The Globe and Mail

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The best way to protect your retirement savings from a market crash is to safely park enough money to cover your income needs for two to three years.

Until 2022, safe parking has meant dead money. Now, with interest rates rising, you can adopt this strategy with a smile on your face. Rates were high enough in mid-May that you could build a three-year ladder of guaranteed investment certificates earning an average return of as much as 3.8 per cent.

A feature of every stock market crash I’ve seen as a personal finance and investing writer is the senior distraught over the idea of having to sell hard-hit stocks and equity funds to cover the minimum annual required withdrawal from a registered retirement income fund. In both the 2008 and 2020 crashes, the federal government allowed a 25 per cent reduction in the minimum RRIF withdrawal for those years. But that’s only a limited benefit and, anyway, seniors shouldn’t depend on the feds for help with their investment portfolios every time stocks plunge.

The best strategy for protecting a RRIF against inevitable stock market declines is to keep a reserve of money to draw from when selling stocks or equity funds would lock in a serious loss. At bare minimum, have enough money for one year. At best, try for two to three years.

You could keep this money in a high interest savings account, where rates have recently climbed to between 1.5 and 2 per cent at best among alternative bands and credit unions. If you have the financial flexibility to lock money into a GIC, the best one-, two- and three-year rates in mid-May were 3.35, 3.95 and 4.1 per cent, respectively.

Those rates were available from alt banks that sometimes don’t offer RRIF accounts. An alternative is to see what GIC rates your broker offers for RRIFs. Online brokers have unusually competitive GIC rates right now – not as high as alternative GIC issuers like Oaken Financial and EQ Bank, but close.

With a three-year GIC ladder, you invest equal amounts in terms of one through three years and invest each maturing GIC into a new three-year term. If a two-year term seems a better fit for you, try that. They key is to have cash safely stowed so that you can give your stocks time to recover from the next stock market decline.

— Rob Carrick, personal finance columnist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Colliers International Group Inc. (CIGI-T) On May 3, the global real estate services and investment management company reported solid first-quarter earnings results and increased its 2022 outlook. Yet, high inflation, rising interest rates and concerns about a potential recession continue to weigh on stock markets, including Colliers, which is down 23 per cent year-to-date. There has been opportunistic buying on this price weakness, with the company repurchasing nearly 1 million shares in March and April. As well, the chief executive officer recently invested over $17-million in shares of Colliers. Should investors consider buying shares as well? Jennifer Dowty looks at the investment case.

The Rundown

Now is the perfect time to slay these five investing myths

During volatile times like this, it’s important not to let myths sabotage your investing plan. Some of these myths are so pervasive and ingrained in our culture that many people don’t question them. They reflect the way investing is portrayed in the media, from financial websites and business channels to movies and the evening news, where dramatic events – especially ones in which people make or lose a lot of money – get the most attention. John Heinzl presents five of the most common investing myths. Become familiar with them so that, to paraphrase Rudyard Kipling, you can keep your head while everyone else is losing theirs.

Also see:

Tim Kiladze: The human flaws that fuelled this market crash – and why they keep failing us when investing

Rob Carrick: A five-step plan for dealing with the sad fact that almost every investment is falling lately

Gordon Pape: Seeking places to hide during the current investing storm

Know your history before buying the current dip

Investors who bought stocks in the depths of the great financial crisis in early 2009 were quickly rewarded. So were those who bought the dip in the early days of the COVID pandemic. Will that same bounce occur again? Don’t count on it. Share prices will no doubt eventually recover from their recent weakness – they always do – but reaping the rewards is likely to require more patience this time around, says Ian McGugan.

Also see: Signs of market bottom elude investors after steep selloff

Bank stocks are reflecting a lot of risk. Now let’s look at the reward

Canadian big bank stocks have tumbled more than 14 per cent over the past three months, as concerns about an oncoming recession rattle equity markets. The potential rewards of buying into this dip are becoming hard to ignore, says David Berman.

Why the Canadian dollar is poised to surge

Forex traders beware: economist David Rosenberg and his team believe any dip in the Canadian dollar should be bought. In fact, they think the loonie is considerably undervalued and will soon zoom up to 83 cents (U.S.). Here’s why.

Also see: ‘TINA’ still driving hedge funds’ bullish dollar view

Why this portfolio manager sold his Magna stock (and wishes he’d bought Disney)

Money manager Denis Taillefer is holding a lot of cash, awaiting what he calls ‘peak interest rate hawkishness.’ Brenda Bouw speaks to the senior portfolio manager at Caldwell Investment Management Ltd. to find out what he has been buying and selling.

Others (for subscribers)

BlackRock’s Rieder: Summer rally coming in U.S. bonds but bull market likely over

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO and CFO are buying this high-yielding REIT with a 32% gain forecast

Globe Advisor

Major asset managers want bigger share of thematic ETF market as number of offerings increase

Reasons why the tech stock crash may be far from over

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation – a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I have stocks in my TFSA and in my cash account. There’s one investment in my TFSA that I think will pay off but will take longer to do so than some in my cash account.

I’m thinking of transferring the one in my TFSA out in kind, creating plenty of room so that I can transfer in some of the investments that are closer to the finish line. What do you think of this strategy? – Chantal M.

Answer: Your logic puzzles me. The main objective of a TFSA is to maximize the tax-sheltered profits on your invested money. But your suggested approach would do the opposite. Let’s look at the two sides of your equation.

You say the stock in the TFSA looks promising but will take longer to pay off. But as its value grows in the TFSA, those gains will be tax-free. Moving the stock to your cash account will mean all the gains from the time of the switch will become taxable when you sell.

Meantime, you want to move stocks that are “closer to the finish line” into the TFSA. To what end? If they are that close to your sell objective, most of your gain is already taxable. Remember, when you make a contribution in kind, the Canada Revenue Agency considers that as a sale at the market price on the day the shares go into the TFSA. You are taxed accordingly. If you really plan to sell soon, moving those shares into the TFSA will not be of much benefit.

You need to consider the potential profit of each stock, not from the time you bought it but from the day it goes into (or comes out of) the TFSA. Those with the highest long-term growth potential should be in the plan.

–Gordon Pape

What’s up in the days ahead

Bonds have been producing terrible returns this year, but many investors still want to hold them as a stabilizer in a balanced portfolio. Are short-term bond funds the way to go? Gordon Pape will have some fixed income advice.

Click here to see the Globe Investor earnings and economic news calendar.

Share your investing successes (or misfires)

Are you interested in being interviewed about your first stock purchase? Globe Investor is looking for Canadians to discuss their experience as part of this new, ongoing feature. If you’d like to be interviewed, please write to: jcowan@globeandmail.com with “My First Stock” in the subject line and include a short description of your first stock purchase.

Compiled by Globe Investor Staff

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New Zealand Plans More Digital Skills Investment to Bridge Gap – BNN

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(Bloomberg) —

New Zealand will make a new investment in the digital technologies sector with the aim of increasing skills development and encouraging local companies to market their talents globally.

The government will allocate NZ$20 million ($13 million) over four years from this week’s budget, Minister for the Digital Economy David Clark said in a statement Monday in Wellington. The spending will support the growth of the Software-as-a-Service community and take a new a marketing initiative led by industry in partnership with government, to the world, he said.

“Through this new funding, the SaaS Community can build its momentum further and expand its network,” Clark said. ‘It will also support the delivery of short courses for digital skills development.”

The government wants to address a shortfall of investment in technology education that has created a skills gap and forced several local companies to shift offshore to find the talent they need. A report from the OECD highlighted a weak pipeline of advanced information technology skills while Wellington-based game developer Pikpok this year opened a studio in Colombia to tap talent there that isn’t available at home.

“We know for the digital sector to grow, it needs access to the right people,” said Clark. “Historically, there has been a ‘skills mismatch’, but the key to future success is training our domestic talent with the right skills, and encouraging New Zealanders to participate, whatever their background.”

Changes to the immigration system will help alleviate some of the immediate pressures on industry, with key roles including software engineers entitled to fast track residency, he said.

©2022 Bloomberg L.P.

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