Mutual Fund Investing
Mutual Funds are one of the more commonly recommended ways for new investors to dip their toe into the stock or bond market.
Maybe you are an under the mattress or CD type investor who is paralyzed by all the horror you read about Wall Street.
I mean, I understand. I have been investing for 25 plus years, and the market continues to surprise, shock, annoy, and nearly annihilate (not really, but needed an “A” word…)
Wall Street Woe’s:
- The tech bubble of the late 90′s
- The mortgage related financial crash over the last few years
- The flash crash in May of 2010
None of these events make a new investor feel warm and fuzzy about sending his or her hard earned money to a nameless/faceless company to invest for you.
The Evil Mutual Fund Manager!
I can just see it now, your imagining the Captain Evil -Mutual Fund Manager, getting his massage on his yacht, drinking Cristal. His captain, meanwhile prepares his chopper for the short flight to Paradise Island. The evil MFM, has a date with a super model, and will lose more than your lifetime salary playing the “don’t come” line at the craps table. Knowing it doesn’t matter, as the money flows keep coming in…..
But in the real world, Mutual Fund managers are under a tremendous amount of pressure to produce. However, the deck is stacked against them, and the majority of mutual funds don’t beat their comps. What is a comp. you say?
Mutual Funds and Their Comps:
Well, I am glad you asked that question. A comp. is the barometer by which the mutual fund results are compared to. It is the standard the industry uses to determine that fund’s success.
For example, lets say a funds comp is the S&P 500-a group of large cap stocks. If the S&P goes up 8%/year for the last 5 years, but our mutual fund managers fund only goes up 5%, then he didn’t beat the comp. However, if for 5 years he beat the comp, even by only a small percentage, then he is a hero, among fund managers, given huge bonuses. ’cause beating these averages is hard to do.
That is why many experts say, ignore these stock picking funds, and just go with the index fund and you will at least get market returns, and not have to worry about your fund manager lagging behind the market.
Mutual Fund Focus:
When you are investing in mutual funds, the things you need to focus on are:
- What type stocks are the fund investing in?
- How does the fund compare to its peers and its comp. in the long haul?
- What are the fees associated with investing in this fund?
- What are the tax consequences of the type of investing that is done by this mutual fund manager?
Shocking Mutual Fund Facts:
Russel Kinnel, in a post on Morningstar, highlighted 12 shocking facts about Mutual Funds. I found the facts to be more amusing than shocking, but lets highlight a few:
- 650 funds with “growth” in their name actually shrunk over the last decade
- 54% of the funds with “plus” in their name underperformed the market over the past 5 years
- 75% of funds ranked with only one star (Morningstar’s lowest ranking) in 2005 are no longer in existence today. (That doesn’t mean that the depositors money was lost, most of these funds were absorbed into other funds managed by the same family….)
- He lists 18 funds that have outperformed their peers for over 12 years in a row. “THAT’S WHAT I AM TALKING ABOUT!
YOU can pick a fund that out-performs, but you have to do your homework. If you don’t want to do that, then buy index funds for the stock portion of your investment. And a Bond fund that has a good long-term track record.
Then decide your percentage of stocks vs bonds, and keep on working at your day job, taking care of others….
Here are a few links to articles that do a good job explaining a few of the issues above:
- Index vs Actively Traded funds at the Amateur Financier
- Morningstar rankings explained at My Journey to Millions
Reader Questions:
Do you own mutual funds, and if so, do you know their track record, and how they compare to their peers?
Tags: basics of mutual fund investing, facts about mutual funds, index vs managed funds, mutual fund investing
Very nice article, and thanks for linking back to me! There does seem to be an unfortunate tendency to demonize mutual fund managers, even though all they are doing is trying to do better than the rest of their peers and their benchmarks. (Which is what most of us try to do in our jobs, anyway; few people want to be average…) Actively managed funds can have a place in people’s portfolios, although as you say, you need to watch them much more closely than index funds.
Thanks, Roger. You have a lot of great info on your site. Most fund managers are just trying to make a living and make money for their clients. It is just a difficult job to beat the market, anytime. Those that do it consistently deserve a lot of credit, and their healthy salaries!
[...] This post was mentioned on Twitter by billybroas, Dr. Dean Burke. Dr. Dean Burke said: New Blog Post: Mutual Fund Facts: Funny or Merely Farcical? http://bit.ly/cR08fq [...]
Completely agree – it is possible to beat the “market” if you are willing to do due diligence. If you are not willing (or don’t have the time), but an index!
A lot of time and effort has to be dedicated to learning active investing. It is not for the average Joe, or Jane. But it can be fun, and profitable with due diligence!
[...] Financial Objectives with Mutual Fund Facts: Funny or Merely Farcical? I know I don’t discuss investments often, so here you [...]
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[...] Mutual Fund Facts: Funny or Merely Farcical? at the Millionaire Nurse Blog. Dr Dean gives us a refreshing look at mutual funds. No demonizing or doomsday predictions. Just the facts. [...]
That is why many experts say, ignore these stock picking funds, and just go with the index fund and you will at least get market returns, and not have to worry about your fund manager lagging behind the market.