The âtheyâ Iâm referÂring to in the title is not your adviÂsor, but rather the whole indusÂtry at large.
We hear that mutuÂal funds are betÂter. Mutual funds help indiÂvidÂuÂals to diverÂsiÂfy. We hear that indiÂvidÂual investors shouldÂnât be investÂing in indiÂvidÂual stocks.
The thing is, that may be true, in part. HoweverâŠ
- So many mutuÂal funds invest in the same underÂlyÂing comÂpaÂnies (equiÂties). If you have 3 or 4 difÂferÂent funds, are you realÂly diverÂsiÂfied? Sure, you might have bond funds and forÂeign equiÂty funds, but⊠how many peoÂple actuÂalÂly do that? Donât know.
- Mutual funds are opaque. Meaning, theyâre either pasÂsiveÂly manÂaged (which is a betÂter choice by most meaÂsures) or activeÂly manÂaged. If theyâre activeÂly manÂaged thereâs almost no visÂiÂbilÂiÂty or accountÂabilÂiÂty into how theyâre manÂaged. In comÂparÂiÂson to indiÂvidÂual stocks/companies, where four times a year you can read the 10Qâs (regÂuÂlaÂtoÂry filÂings) and actuÂalÂly lisÂten to the CEO explain how he is manÂagÂing the comÂpaÂny. When you invest in funds (or using roboadÂviÂsors like Wealthfront) you abdiÂcate responÂsiÂbilÂiÂty. Thatâs scary to me. Thereâs no way to move up the learnÂing curve to underÂstand more with funds, as there is with indiÂvidÂual comÂpaÂnies. Iâm sure most peoÂple would not read 10Qâs, but lisÂtenÂing to conÂferÂence calls is as easy as lisÂtenÂing to a podÂcast with an episode once a quarÂter.
- The biggest point, howÂevÂer, are the fees you pay. When you invest in an indiÂvidÂual comÂpaÂny you pay a comÂmisÂsion to do so and youâre done. When you invest in a mutuÂal fund you pay again every year. Every. Single. Year. Thatâs just crazy to me.
That annuÂal fee is big, big busiÂness. I just wonÂder about incenÂtives.
Do we keep hearÂing that indiÂvidÂual investors shouldÂnât invest in indiÂvidÂual stocks because if we did, the whole mutuÂal fund indusÂtry wouldÂnât exist?
I believe that mutuÂal funds exist as a way to bilk retireÂment funds, like 401(k)s which for the most part only conÂtain funds. But hey, just because Iâm paraÂnoid doesÂnât mean theyâre not out to get me.
Investors will spend $70 bilÂlion in fees to mutuÂal funds and ETFs next year.
(Theyâll spend $60 bilÂlion on beer)https://t.co/u804ye7Ukf
â Downtown Josh Brown (@ReformedBroker) September 2, 2016
Let me know what you think