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…
- 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.
- 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.
- 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.
Investors will spend $70 billion in fees to mutual funds and ETFs next year.
(They’ll spend $60 billion on beer)https://t.co/u804ye7Ukf
— Downtown Josh Brown (@ReformedBroker) September 2, 2016