Dirty Secrets About Mutual Funds
This essay is intended to illustrate to investors what they are getting into if they trust mutual funds as a way to ensure their financial freedom in retirement.
Due to the complexities of tracking stocks and finding competent money management, unless you’re a billionaire, many Americans have turned to the quick fix known as a mutual fund.
In a recent comment, insiders have adopted the following views on mutual funds. “Most mutual fund investors have no idea what they are investing in, which is the way the industry wants it.” Also, mutual funds have problems because they reward them for the amount of money they attract, not the amount of money they make.
SEC Chairman Arthur Levitt, Jr. warned of growing injustice in the relationship between individual investors and mutual funds in January 2001. Mr. Levitt made the following comment:
“THERE ARE A NUMBER OF INSTANCES THAT, FRANKLY, DO NOT HONOR AN INVESTOR’S RIGHTS. INSTANCES WHERE … HIDDEN COSTS HURT INVESTORS, WHERE SPIN AND HYPE DO THE TRUE PERFORMANCE OF A MUTUAL FUND, AND WHAT IT DOES. ACCOUNTING TRICKS THE GAME OF HAND DESIGNS THE FINANCIAL RESULTS OF A FUND “
In effect, there are FIVE separate bills that mutual funds collect. The best way to determine whether or not something is effective for you is to dollarize the profit or burden. When you invest in the typical mutual fund (assuming it is not included in a qualified retirement plan), you face the following costs that erode your benefit and you probably never knew about them, you will not find them in your prospectus and your broker is not. I’m going to sit down and tell you about them. The five costs of investing in mutual funds are:
1. Tax costs: excessive capital gains from active trading.
2. Transaction costs: the cost of the transactions themselves.
3. Opportunity costs: dollars taken from portfolios for the custody of a fund.
4. Sales charges, both visible and hidden.
5. Expense ration (“management fees”): no end to increases on the site.
PLEASE READ CAREFULLY:
How do all these funding costs affect you? Well, with the expense ratio averaging 1.6% per year, sales charges 0.5%, portfolio transactions generated by turnover cost 0.7%, and opportunity costs, when the funds have cash instead of remaining fully invested in stocks. , 0.3%. The average mutual fund investor loses 3.1% of their investment returns at these costs each year. While this may not seem like much on the surface, the costs would consume 31% of a 10% market return. Add in the 1.5% capital gains tax bill that the average fund investor pays each year, and that figure shoots up to 46%, nearly half of a potential 10% return. Do you feel like you are taking a step or two back as you try to move forward?
In his book “The Trouble With Mutual Funds,” Richard Rutner shares that “No one denies that the average mutual fund performs 2% less per year than the general stock market. Yet the mutual fund industry spends thousands of dollars. million dollars from shareholders to promote their money managers as experts who can skillfully manage investor dollars. The vast majority of mutual funds (94% according to a recent five-year survey by Lipper Analytical Services) have had a underperforming the stock market as a whole. “
Therefore, the public receives FIVE serious myths and it would be wise to inform themselves about these fallacies.
Myth No. # 1: mutual funds are long-term investment vehicles
In 200, 451 funds simply disappeared, like Jimmy Hoffa.
Myth # 2: Mutual fund fund managers are long-term investors.
The average fund traded 15-20% of the shares in its portfolio in the 1950s. Currently, the trading rate within the average fund has exceeded 95%. For the most part, fund managers are short-term speculators.
Myth No. # 3: Mutual fund shareholders are long-term owners.
Today’s rapid redemption rate is 75% higher than the average rate throughout the 1970s. This clearly violates the most fundamental principle of investment success: long-term buy and hold.
Myth # 4: Mutual fund costs are going down.
In 1950, the average stock fund earned about three-quarters of a percentage point. By early 2001, that number had more than doubled.
Myth No. # 5: Mutual fund returns meet reasonable investor expectations.
In the largest of the bull markets, funds of all sizes seriously underperformed the stock market. The inability of 85% of all fund managers to match overall market performance is the result of high fees (see above) short-term investment horizons and substantial transactions and tax costs.
If any of this scares you, reconsider your investments. The asset allocation model where they show you a pie chart with so many stocks, so many bonds, and maybe 3% cash is a failure. This was designed for institutions with 100% investable assets, not for people with lifestyle needs and expenses. You will never see real estate on that pie chart, yet for most Americans, your home is worth more than your other investments. No one offers the idea of buying investment properties that appreciate and allow you to reap dollars through refinancing and adjusting rents to cover your cash crop. Once you harvest, it’s time to deploy, and just like the seasons, you can cycle through the same cycle over and over again increasing your wealth.
However, having a property as an investment does not mean that you do not manage it. What do i mean? You need to be responsible and manage the equity that your home accumulates and if you have investment properties then you need to manage those properties like an investment portfolio with precise planning so that you don’t create negative cash flow because cash is king. In the corporate world, companies that do not properly manage their cash flow often fail to survive. Similarly, when individuals or families fail to properly manage their cash flows, they end up in the same place, bankruptcy court.
The four letter word that no business can live with and is known as the lifeblood of any business is EFFECTIVE. Consequently, the individual investor is best served when he thinks like a business and creates cash flows to deploy with leverage in arbitrations. What did you just say? If these terms are foreign to you and you claim to be an investor, you’d better look them up because they are as old as salt in the financial world and are the best investment advice that three self-made billionaires at Forbes 400 have ever heard. If you don’t know how to incorporate cash flow, arbitrage, and leverage into your investment plan, find a company that does before it’s too late.
If you’d like to learn more about how leverage, arbitrage, and cash flow creation can benefit your portfolio or rebalance it positively, call the author.
James Burns, Esq.
Attorney at law
DUCT OF LEGAL WEALTH
“The complete solution”
18662 MacArthur Blvd.,
2nd floor
Irvine, CA. 92612
PHONE: (949) 440-3243
Fax: (714) 464-4448
www.3pillarsofwealth.com
