Whose side are they on?

The ‘they’ I’m refer­ring to in the title is not your advi­sor, but rather the whole indus­try at large.

We hear that mutu­al funds are bet­ter. Mutual funds help indi­vid­u­als to diver­si­fy. We hear that indi­vid­ual investors should­n’t be invest­ing in indi­vid­ual stocks.

The thing is, that may be true, in part. However…

1. So many mutu­al funds invest in the same under­ly­ing com­pa­nies (equi­ties). If you have 3 or 4 dif­fer­ent funds, are you real­ly diver­si­fied? Sure, you might have bond funds and for­eign equi­ty funds, but… how many peo­ple actu­al­ly do that? Don’t know.
2. Mutual funds are opaque. Meaning, they’re either pas­sive­ly man­aged (which is a bet­ter choice by most mea­sures) or active­ly man­aged. If they’re active­ly man­aged there’s almost no vis­i­bil­i­ty or account­abil­i­ty into how they’re man­aged. In com­par­i­son to indi­vid­ual stocks/companies, where four times a year you can read the 10Q’s (reg­u­la­to­ry fil­ings) and actu­al­ly lis­ten to the CEO explain how he is man­ag­ing the com­pa­ny. When you invest in funds (or using roboad­vi­sors like Wealthfront) you abdi­cate respon­si­bil­i­ty. That’s scary to me. There’s no way to move up the learn­ing curve to under­stand more with funds, as there is with indi­vid­ual com­pa­nies. I’m sure most peo­ple would not read 10Q’s, but lis­ten­ing to con­fer­ence calls is as easy as lis­ten­ing to a pod­cast with an episode once a quar­ter.
3. The biggest point, how­ev­er, are the fees you pay. When you invest in an indi­vid­ual com­pa­ny you pay a com­mis­sion to do so and you’re done. When you invest in a mutu­al fund you pay again every year. Every. Single. Year. That’s just crazy to me.

That annu­al fee is big, big busi­ness. I just won­der about incen­tives.

Do we keep hear­ing that indi­vid­ual investors should­n’t invest in indi­vid­ual stocks because if we did, the whole mutu­al fund indus­try would­n’t exist?

I believe that mutu­al funds exist as a way to bilk retire­ment funds, like 401(k)s which for the most part only con­tain funds. But hey, just because I’m para­noid does­n’t mean they’re not out to get me.

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