Why Mutual Funds are one of the Worst Possible Investments
For many people, investing means choosing what to do with their 401(k) or IRA accounts. When it’s time to make a choice, a would-be adviser chooses some mutual funds to invest in. This is the most common method of investing in America. And it’s also one of the worst.
One of the main reasons that mutual funds do not serve us as investors is because they are designed to make money for the advisor and the company that provides them. For most advisors, it’s their job to sell mutual funds. And that’s what they do. That’s how they make a living. But these mutual funds are quite poor for the people who buy them.
Although the investor takes 100% of the risk in mutual funds, on average, they only receive 20% of the profits. This means that 80% of the profits goes to the financial advisor and the company who sells the mutual fund. This money is taken away from the investor in the form of fees. The fees are described in terms of a few percent. Since a few percent sounds like a small amount of money, most people don’t even realize just how much is being taken away.
Another major reason that mutual funds are terrible investments is that there is a major risk of fraud. Bernie Madoff made the news by stealing over $50 billion of investor money. People thought that the SEC would protect them, but they were sorely mistaken. Do you think that Madoff is the only scam artist running mutual funds? It’s pretty obvious that there are others who have yet to be discovered.
Another problem with mutual funds is that the investor has no control over the assets being purchased. If the stock market goes up or down, the investor is at the mercy of the market. When the mutual fund manager makes a decision, the investor has no control over that decision. One of the characteristics of successful investors is that they control their investments. For more information about control, see this post.
It’s useful to see how mutual funds came into existence. After the crash of 1929, Americans were afraid of investing. The SEC was set up, and a division was created between those who were savvy about investments and those who were not. 50 years ago, it was believed that you needed to be an expert to choose investments. So the mutual fund manager became the expert that would help us.
But the times have changed. The Internet is the great equalizer. Now, it’s common knowledge that most mutual funds perform worse than the market average. Now people are smart enough and educated enough to choose thier own investments. They may not choose to buy and sell stocks like a mutual fund manager, but it’s clear that we all find a way to invest successfully.
This is the sixth post in a series entitled Secrets the Financial Industry doesn’t Want you to Know.
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Related posts:
- Automated Trading Compared to Mutual Funds
- Secret #6: The Government lets Mutual Funds Charge Hidden Fees
- Mutual Funds and the Concept of Value Creation: Part 1
- Madoff and the Mutual Fund Industry
- Buy and Hold Investing vs. Hedge Funds
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
