THE ALCHEMIST by AL THOMAS
MUTUAL FUND STUPIDITY
For years the mutual fund industry has been
going great guns taking peoples' money and for the
most part doing a very lousy job of making a good
return for the investor. The reason I say that is
that 80% of them cannot meet the results of the
Standard & Poor’s 500 Index.
The S&P 500 is the most important 500 stocks
of the New York Stock Exchange with a few others
thrown in. If you buy any fund that is not
composed of this index you are relying upon the
fund manger to be able to weed out the poor stocks
and buy the best ones. After all he is a
“professional” and should know more than a monkey
with a dart.
Having been an exchange member and floor
trader I consider it rather easy to go thru the charts
of 500 stocks to eliminate the weakest 200 or 300.
There are even services that categorize all the
NYSE stocks in 5 categories from best to worst if
he doesn’t want to do the work himself yet the
largest majority of managers can’t seem to make an
average amount of money. By average I mean beat
the average performance of all the stocks in the
S&P500 Index.
When you go to the hospital do you want an
average doctor operating on you? Mutual fund
managers are financial doctors only they are
operating on your wallet. You sure don’t want your
money with Mr. Average.
Funds are luring you to give them money
because they have a lower expense ratio, a famous
manager,a specialized category, a socially responsible
portfolio or some other nonsense. Why do I say
nonsense? Because it doesn’t make any difference
which fund you are buying as long as it is
outperforming all the others.
There is one sure way to increase your return
and that is not to pay commission. That is called a
“load” in the industry and it might not show when
you buy it, but be charged when you sell. No load
funds do as well and better than load funds.
Now many funds are adding redemption fees. It
is an excess charge of a flat dollar amount to as
much as 2% of your sale if you sell before a
certain period of time. If their fund is declining
they don’t want you to take your money out so they
put this additional charge as a way of keeping you
in.
There is a new group of mutual funds that is
called Exchange Traded Funds. There are hundreds
of them and they are becoming the bane of the
traditional mutual funds. These trade like stocks,
can be bought or sold during the day with
permanent stop loss orders in place. The
commission charge at most discount brokers is $15
or less. Their expense ratio runs close to zero so
you also save money there. A win, win, win for the
investor.
Mutual funds will discourage investors from
buying these only because they don’t want to lose
your account. There are many sources of
information about ETFs and the easiest is
www.google.com. Just type in ETF and you will be
inundated with all you need to know.
Unless mutual funds stop chasing customers
away with high commissions, redemption fees and poor
performance the ETFs are going to take a large
portion of the investor funds.
About the Author
FREE investment letter www.mutualfundmagic.com
Author of best seller "IF IT DOESN'T GO UP,
DON'T BUY IT!" Never lose money in the market.
Copyright 2004 Albert W. Thomas All rights
reserved. Former 17-year exchange member, floor
trader and brokerage company owner.