Why mutual funds are lousy long term investments

Investors should not be worried about the short-term fluctuation in returns while investing in equity funds. You should choose the right mutual fund, which is in sync with your investment goals and invest with a long-term horizon.

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That person has about 45 years to go before retirement -- 20 to 65 -- and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that's 65 years of investing. He continued: "Now the financial system -- the mutual-fund system in this case -- will take about 2. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return. And you, the investor in this long time period, an investment lifetime, put up percent of the capital, took percent of the risk, and got only a little bit over 20 percent of the return.

That's a financial system that's failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, that investors face today.

So the system has to be fixed," said Bogle. In other words, the longer you invest, the more the investment house makes. That's why the financial institutions recommend you invest for the long term.

The next time you hear a financial expert recommend that you "invest for the long term in mutual funds," take a moment to ask them to explain how their fees work over the long run.

I suspect you'll hear some interesting answers -- if they can answer the question. The reason they'll probably not be able to give you a definitive answer is because most financial experts don't know how much a mutual fund's fees and expenses are as most funds aren't required to disclose all such charges.

In other words, there's no transparency. If you're a passive investor, you may want to consider investing in index funds, which Mr. Bogle's fund company, Vanguard, specializes in though not exclusively. Simply put, index funds have lower fees so the investor has a chance of making more money.