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Those of us who lived through the rip-roaring inflation of the 70s are keenly aware of the pernicious effects of this confiscation of our earnings and wealth. Those days saw inflation rates up to 15% that wreaked havoc on the economy and household wealth and endured for several years. During that time, the average worker and investor saw his/her paycheck and accumulated wealth steadily erode and lose enormous amounts of buying power.

Today, official government figures tell us that inflation is running less than 2%. Those of us who actually pay every day bills experience increases more on the order of 10-15% in health insurance premiums, 8% in car and home insurance premiums, 10% annual increases in property taxes, 20-30% increases in gasoline prices, and on and on.

In the same fashion, those who invest in the average actively managed mutual fund are experiencing a steady erosion of wealth to the detriment of every investor who aspires to actually retire one day.

As of July, 2012, 89.84% of actively managed funds failed to beat the S&P Composite 1500 index, yet the average fund charged 1.5% in combined management and expense fees. As if that record wasn't bad enough, over the past three and five years, those numbers were 73.24 percent and 67.72 percent, respectively.

In other words, not only do most funds fail to keep pace with the broad market index, they also charge you 1.5% for the privilege of under-performing. Once you account for this 1.5% in expense fees and 2.0% for inflation (feel free to substitute whatever percent you are experiencing in real life), and your federal and state taxes, it's darn hard to get ahead like this.

Fire Your Funds and Rescue Your Retirement Fund

But, there's another way, and you can rescue your retirement fund if you become actively involved.

Assuming an initial investment of $100,000, the table below illustrates, over a period of 30 years, approximately what you could expect from an investment in the average mutual fund, with 1.5% of fees netted out from a long-term average return in the markets of 10% (This would include the average hefty contribution of dividends which make up about 40% of the average long-term return in the market). This is also being kind to the mutual fund, since, as discussed, most funds fall woefully short of the long term averages.

The next column calculates the 10% average return on capital you would expect long-term, with NO fees deducted if you invested on your own. Finally, the last column illustrates the amount the investor would save each year had he invested on his own and saved the 1.5% mutual fund fees and kept them in his own pocket, where it belongs. It illustrates accumulated savings from year to year.

Initial

Capital growth of portfolio @ 10%

Capital growth of portfolio @ 10%

Savings from NOT investing

Investment

minus 1.5% expense fee

with no fees

in Mutual Fund

$100,000

$108,500.0

$110,000.000

$1,500.000

Value at end of year #2

$117,722.5

$121,000.000

$3,277.500

$127,728.9

$133,100.000

$5,371.088

$138,585.9

$146,410.000

$7,824.130

$150,365.7

$161,051.000

$10,685.331

$163,146.8

$177,156.100

$14,009.349

$177,014.2

$194,871.710

$17,857.485

$192,060.4

$214,358.881

$22,298.447

$208,385.6

$235,794.769

$27,409.198

$226,098.3

$259,374.246

$33,275.902

$245,316.7

$285,311.671

$39,994.967

$266,168.6

$313,842.838

$47,674.214

$288,793.0

$345,227.121

$56,434.165

$313,340.4

$379,749.834

$66,409.476

$339,974.3

$417,724.817

$77,750.529

$368,872.1

$459,497.299

$90,625.196

$400,226.2

$505,447.028

$105,220.797

$434,245.5

$555,991.731

$121,746.271

$471,156.3

$611,590.904

$140,434.580

$511,204.6

$672,749.995

$161,545.382

$554,657.0

$740,024.994

$185,367.990

$601,802.8

$814,027.494

$212,224.644

$652,956.1

$895,430.243

$242,474.151

$708,457.4

$984,973.268

$276,515.908

$768,676.2

$1,083,470.594

$314,794.359

$834,013.7

$1,191,817.654

$357,803.938

$904,904.9

$1,310,999.419

$406,094.538

$981,821.8

$1,442,099.361

$460,277.565

$1,065,276.6

$1,586,309.297

$521,032.648

Value at end of year #30

$1,155,825.2

$1,744,940.227

$589,115.063

Although current law requires a mutual fund to reveal in its prospectus what its management fee is, precious few investors pay much attention. Even fewer investors stop to calculate what this percentage represents in actual dollars paid (whisked out of their pockets). It is especially not transparent, since it is deducted daily from the price quoted at the end of trading each day.

"A billion here, a billion there…"

The esteemed senator from Illinois, Everett Dirksen, once said, "A billion here, a billion there, pretty soon you're talking real money." Who's going to notice 1.5% divided by 365 days= .00004109 per cent missing each day from his invested funds? To paraphrase Mr. Dirksen, .00004109 per cent here, .00004109 per cent there, pretty soon you're talking real money.

Examine the above table carefully, and you can easily see that this tiny-seeming mutual fund fee adds up pretty quickly, and pretty immensely in fact. Wouldn't you rather see that extra $589,000 after 30 years of investment in your own pocket rather than theirs? In the first year, that 1.5% fee cost you $1500.00. By the end of year 30, that 1.5% fee is costing you $17,337.00. That's for just one year of managing your money! And not managing it wisely for the most part.

If you've managed to accumulate $1 million, place a zero after each of the numbers discussed so far, and apply to each number in the above table. In other words, in your first year, that 1.5% management fee cost you $15,000.00, and after year 30, that same 1.5% fee will cost you $173,370.00. This means that after year 30, you will be paying out over 17% of your original invested amount, and climbing, each and every year. This is the enormity of the problem. You can solve this problem by investing in equities on your own and save your retirement.

Build your own fund, by yourself and for yourself.

Okay, it doesn't have to be all by yourself. Seeking Alpha has many great contributors and authors with wonderful ideas to begin your search. But the fund you ultimately build will certainly be for yourself.

Choose stocks that have long records of paying solid dividends and increasing those dividends to keep you ahead of inflation. Choose stocks with high levels of free cash flow. Discover stocks whose dividend payout is no more than 70-80% of their free cash flow. Look for company dividends with compound accumulated growth rates that are solid.

Dividends on Parade

Kinder Morgan Energy Partners (NYSE:KMP) is a master limited partnership engaged in building out the nation's energy infrastructure. It builds pipelines for the transportation of petroleum and natural gas and operates storage facilities. It is essentially a toll road, charging oil and gas companies to transport their goods through their pipes. It pays a current dividend of $5.20, for a 5.9% yield. It has compiled a record of paying an ever-increasing dividend for 21 years, keeping investors very comfortably ahead of inflation. It sports a compound dividend growth rate of 14.32%, more than enough to pay for all your gasoline for your car and natural gas to heat your house in the winter.


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Other fine MLP candidates to consider for gushers of increasing dividends are Calumet Specialty Products (NASDAQ:CLMT), Linn Energy, LLC (NASDAQ:LINE), Breitburn Energy Partners L.P. (NASDAQ:BBEP), Enterprise Products Partners (NYSE:EPD), Energy Transfer Equity, L.P. (NYSE:ETE), Energy Transfer Partners, L.P. (NYSE:ETP), Legacy Reserves L.P. (NASDAQ:LGCY), Martin Midstream Partners LP (NASDAQ:MMLP), Magellan Midstream Partners LP (NYSE:MMP), Natural Resource Partners LP (NYSE:NRP), NuStar Energy LP (NYSE:NS), and Plains All American Pipeline, L.P. (NYSE:PAA).

Consolidate Edison, Inc. (NYSE:ED) engages in the delivery of electric, gas and steam to over 3 million customers in the New York City and Westchester areas. It has been paying an ever-higher dividend for 43 years. Its current dividend is $2.46, with a yield of 4%. You can rest easy at night, knowing that this powerhouse utility is a mainstay and will keep on delivering inflation beating dividends that will always pay your electric bill.


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Duke Energy Corporation (NYSE:DUK) is another steady eddy electric utility, yielding 4.3% today. For 30 years it has kept its investors supplied with the funds to pay their electric bills as well.

Hospitality Properties Trust (NYSE:HPT) is a real estate investment trust (REIT) that engages in buying, owning and leasing hotels such as Courtyard by Marriott, Residence Inn by Marriott, Staybridge Suites, Candlewood Suites, and others. It owns over 300 hotels, and as a REIT, it distributes at least 90% of its taxable income to shareholders. This resort hotel operator has been distributing solid dividends for over 18 years. It currently pays a dividend of $1.88 for a yield of 6.1%. It has increased its payout yearly, except for a reduction in 2010 to conserve cash as the economy suffered from contraction and the company booked lower revenue during the slowdown. In January 2010, when the company reduced the dividend, the stock was selling for $22. Today it closed at $31.31, for a capital appreciation of 42.31% in just three years. This solid appreciation certainly makes up for the lost dividend income in the interim, and the company resumed its policy of increasing dividends again in Oct. 2012.


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Realty Income Corp. (NYSE:O) is a real estate investment trust currently yielding 3.9%. It owns and leases stores in malls throughout the country and has as its clients many of the largest chain stores. They run at 98% capacity, even during the crash and Great Recession and pay out increasing dividends every month. Had you invested in Realty Income 30 some years ago, the dividend you receive today would represent a more than 100% yield on your original investment, each and every year that you hold onto it.


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Main Street Capital Corporation (NYSE:MAIN) is a business development company (NYSE:BDC) specializing in equity, equity related and debt investments in small and lower middle market companies. Over 5 ½ years it has steadily grown its dividend from an annual amount of $1.32 to a current $1.86, yielding 6.1%. And it now pays out the dividend on a monthly basis, affording the investor the opportunity to reinvest his dividends on a monthly basis to more quickly compound dividend income in the portfolio. This regular monthly stream can be counted on to throw off constant income for you to invest in your own equity investments or debt investments, as you choose, just like MAIN does.

The spike in the chart below was a special dividend MAIN paid in 2013.


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Reynolds American, Inc. (NYSE:RAI) is another steady dividend grower, having increased its dividend every year since 1999, from $.19 quarterly to $.59 quarterly today, for a yield of 4.7%. Reynolds manufactures and sells cigarette and other tobacco products, snuff and e-cigarettes.

If you happen to be among the 20% of U.S. adults who haven't yet kicked the habit, this stock's dividend will keep you in smokes for the rest of your life. Philip Morris International, Inc. (NYSE:PM) and Altria Group, Inc. (NYSE:MO), yielding 3.6% and 4.7%, respectively, are also steady dividend growers with very long histories of increasing their dividends.


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Take the Bull by the Horns

The above names were chosen to demonstrate the necessity of diversifying your portfolio to mitigate risk. It is recommended that the investor interested in converting his mutual fund holdings choose from various industry groups, including utilities, telecoms, master limited partnerships, business development companies, real estate investment trust, tobacco, and consumer staples among them. Assembling a portfolio of 40-50 names, spread amongst these industry sectors, keeping in mind some of the points made above, will go a long way toward building your own fund that you can count on for your retirement, both with respect to increased capital appreciation and growing dividend stream.

Mine Eyes Have Seen the Glory

Up until the most recent crash, I personally held much of our family accounts in mutual funds. I realized in November, 2008, that my coterie of funds afforded me no protection from the train wreck in the markets. I came to understand how much money was wasted on fund fees over the many years I invested and I began a new journey of self-reliance. Combining dividend growth investing with various strategies that I've written about on SA recently, I managed to achieve a yield on cost of 12%, and growing, on my original investment in 4 short years, beginning in March, 2009 when the market bottomed. Disciplined reinvestment of all dividends as they became available has allowed me to personally experience the astounding effect of compounding. It is very real, and available to anyone willing to do the work and stick with this strategy for the long term.

Though all of these stocks mentioned have rewarded me well, discussion of these stocks is not a recommendation but simply a starting point for any investor to do their own due diligence and research to find companies that are suitable to their objectives.

Disclosure: I am long KMP, BBEP, ED, HPT, MMLP, NS, RAI, EPD, LGCY, MMP, O, CLMT, ETE, LINE, MO, PAA, DUK, ETP, MAIN, NRP, PM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Fire That Mutual Fund That Confiscates Your Wealth: How To Rescue Your Retirement