Mutual Funds for the Utterly Confused

It is easy to second guess. In fact, the ability to guess at all is something only humans can do. We can weigh the possibilities of one move over another, project outcomes and chose which path we are better suited to travel. It may be something unique to our species, but it is incredibly frustrating when it comes to investing.

With so many choices and numerous potential outcomes for every decision we make, mutual funds are open to criticisms that other investments are not usually subject to. Stocks are straightforward (although beneath the veneer we have found is often some nefarious dealings that seem undisclosed upon cursory inspection) and bonds are what they are (except when they default and simply leave investors in line for pennies on their dollar). Mutual funds rely on performance.

So it is easy to say thing like: they make money for their managers when they lose money for their investors. It s the AIG paradox, anger over profits that aren’t fully shared with those who believe their slice of the pie is far too small.

But mutual funds are different. To answer the question of whether they ever make money, something numerous folks have emailed me asking: yes they do but it is over the long-term. See this related post for more info: http://mutualfundsinvesting.blog.com/4748146/

Secondly, when most of us invest via employer sponsored programs such as 401(k) plans, your employer does so and encourages this kind of investing in mutual funds because nowhere, in any other investment can you find a broad based portfolio. And it is their obligation and fiduciary responsibility to see that you are doing something for your future. Even if you do it incorrectly and even if the market doesn’t satisfy your expectations.

Third, all mutual funds have done poorly over the past year - but then again, so have almost every stock and bond, save for Treasuries and they, according to Roger Lowenstein in this past weekend’s New York Times Magazine, are also poised for trouble.

Fourth, paying a fund manager more than 2% is too high when similar services can be had for much less. Finding low-cost alternatives is always the best option although most people look for the best performance before they consider the cost of what the fund will charge. Use 1.25% as the high end of your baseline when choosing a fund for purchase. Yes fund managers get their money no matter whether they win or lose, but consistent and unexplained losses don’t reward them with tenure in most cases or new shareholders.

So don’t give up on something you only have passing knowledge of or second guess a tough environment for any investor. Instead, gain more info and make decisions that you have not made. Such as how much risk can you tolerate, how much money are you investing and, more importantly, why.