My friends recently picked up this investing book, and now, even though they have not ever invested a nickle, pick on me all the time for investing in mutual funds. Mine are pretty good–no load, low cost and my returns have been nice over the last three years. I have three, one agressive, one conservitive and an IRA. My friends quote me this book constantly–"Only 4% of mutual funds beat market since 1985", and "Funds are a scam". Me, I have a family, full time job and hobbies–I really dont need the exta time and stress sitting on Ameritrade. They are being such snobs, and its bugging the heck out of me. Are Funds that bad? Can I somehow get through my life without ever having to do stocks myself? Thanks!!
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Is it really that bad that toinvest in mutual funds (USAA)?
digdowndeepnseattle 7:57 pm on February 9, 2010 Permalink
Certainly if you have enough time and money to invest directly into stocks you can do well. But for 99% of the country that’s simply not an option.
In order to have a diversified well rounded portfolio you need equities (large cap, small cap, international, value, and growth) and bonds. Not many people can diversify to that level. Anything less and your risk exposure is way too high. Not only that if you aren’t investing significant chunks of cash the transaction fees will eat you alive.
For the people without the time or the money…the mutual fund option is the only way to go. Certainly when balances get high enough you can put some directly into the market but not before you can do so and make the transaction fees nominal.
Want them off your back? Put 90% of your money into an S&P Index 500 fund and 10% into a Bond Fund. Then continue to make contributions every payroll. When they ask, pull out a sheet that has the stocks that are comprise the S&P and tell them that you are invested in these companies and are doing so with fees lower than what you could get at ANY discount brokerage house. Then when they pull the old tired funds don’t beat the market you can say…I’m matching the market!!! S&P Funds mirror the market. Hence the low fees….
hdsok 7:57 pm on February 9, 2010 Permalink
Mutual funds are a God send to many people who are too busy to do the research necessary for individual stocks and bonds. Even so make sure you do your homework and get into good fund families that will allow you to shift your money at no fee from one fund to the other. don’t do this at every whim, but on major shifts in the market you will be able to conserve gains previously made by doing this. I hope you have a good adviser. I recommend Edward Jones or Charles Scwhaab as they don’t have their own "in house" products to push.
swenjj 7:57 pm on February 9, 2010 Permalink
you have a much better chance of making money than people that just read a book and try to invest, you are having a professional fund manager pick your stocks for you
Frank Castle 7:57 pm on February 9, 2010 Permalink
I can help you for FREE just for a while.
Just enough profits to buy a nice Mercedes Benz with cash just to shut them up!
The funniest part is when they ask you.
How can you afford the (WHATEVER MODEL)? and you reply:
"Some of my Mutual Funds are really up this year"
They don’t have to know you got help from one of the best in the World.
Top 5 Answerer.
b_morrow_98 7:57 pm on February 9, 2010 Permalink
Mutual funds help with diversification, which always needs to be managed if you are in single shares.
If you friends are day traders there is probably no talking with them as they probably think they are investing gurus.
Play it smart – buy in for the long haul. You have it right to be in no load, low cost funds. Rule is that if you are less than 50 years of age, you should have a mix of 80% stock and 20% bonds/cash.
You do have to be wary of smaller fund families, hedge funds, or other specialized funds as they will have greater costs associated with them.
You would also do well to look into index funds or ETF’s as their costs are even lower.
gregory_dittman 7:57 pm on February 9, 2010 Permalink
The so called market in their case is the SP 500 (tracked by SPY). Now many mutuals will track the SP 500 and charge you for it, when you can just buy SPY which is an ETF. There is also a hidden tax you pay for being in a mutual fund that you don’t pay with ETFs. If somebody in a mutual fund sells theri shares, the others in the group have to pay the taxes. You don’t actually don’t see these taxes, but they do take a bite on your returns. So if You bought SPY and a Mutual Fund bought just SPY, you would have a better return if you just held SPY instead of the mutual fund. I’ve seen funds track the SP500 and their returns could be 3% different from each other because of fees and taxes.
derf86 7:57 pm on February 9, 2010 Permalink
I’m not qualified to answer this, but from everything I’ve read two rules always hold true…..research and diversify !!
1) at least your earning something, while the ’snobby’ friends bought a book with their money! Anybody who bases their opinion on ONE book or article is not a very wise person
2) from what I gather, mutual funds are a RELATIVELY secure way to invest your money– you DO have to keep an eye on them though. Keep yourself informed. They can loose money!
3) I bank/invest with USAA also– I trust them and live next door to them actually!! BUT with that said, I wouldn’t put all my eggs in one basket!! They are a great way to invest since they auto-draft from your acct each month, but ya gotta remember each company is only out for themselves…even if its under the guise of ’service’, its always about a companies bottom line.
4)If you work for a place that offers a 401k, check that out too. Even if you dont think you’ll be there that long, life has a funny way of ZIPPING by faster than you think– you could be 100% vested before you know it.
5) CD’s and various savings accounts at other banks, companies, or credit unions are also VERY easy ways to invest (not the greatest of returns…but safe and easy to get out)
Best of luck !! and I’ll check back to see what a more knowledgeable person suggests — thanks for the question!
Ubiquity 7:57 pm on February 9, 2010 Permalink
Do you want to know why mutual funds do not outperform the market. It is not that mutual funds are bad investments, it is a function of risk and what they invest in.
By market performance, people sually refer to the S&P500,a listing of 500 equity securities.
Most funds, except for equity and aggressive funds invest a portion in bonds and other debt instruments. They are safer investments that equity securities. So, although the return is lower, they are safer.
Ifyou wanted to outperform the market, it is easy enough to do, but the risk is much higher. Just find a mutual fund or stock with a beta greater than one.