Here’s part two of my tips for the average Joe investor. Mutual funds suck. I hate to break it to you, especially since a lot of your 401(k) is probably in them. But I don’t like mutual funds for one simple fact: if the person running the fund is so damn smart then why does he/she have to work?
Before I begin, remember my standard disclaimer: I may not know what I’m talking about, and I still have probably 30 years to retire. So, please educate yourself and make your own investment decisions.
Take, for instance, a sampling I took of some of the biggest funds around. I compared their performance against the S&P 500 (Yellow). This is by no means scientific. But, as you can see, it’s easy to find ones that perform way worse than the market indexes and you may even recognize some of these funds.
Even fool.com says:
For many years now the record for equity mutual funds has not been good. Though countless millions of dollars of shareholders’ money is spent annually by mutual funds promoting themselves and the notion that they have “expert” stock pickers, the sad truth (or the funny truth, if you’re in a laughing mood) is that the vast majority of mutual funds underperform the returns of the stock market (as represented by the S&P 500 index). - The Performance of Mutual Funds
Another reason I dislike mutual funds is fees. Not only are you losing money, but you are paying someone to lose your money. I’m guessing you can do that for free by yourself. You can compare fund expenses by looking at their expense ratio. For example, after losing money in that Magellan fund, there’s .71% expense ratio for fees.
So, you might be asking about that chart I posted, “What about that one fund that kicked ass?” Well, you’re right. You can pick winners, but the “vast majority of mutual funds underperform.” That means you either have to be really lucky or do your homework and do all the research on these funds to figure out which are the good ones. This probably includes even researching their top stock holdings. If you go for lucky, you can probably have more fun in Vegas. If you spend all your time researching funds then I don’t see why you don’t just pick stocks. Isn’t that what you’re supposedly paying this person for anyway?
Unfortunately, many 401(k)s don’t give you many options. They want you to invest in their funds so they can make some more money off of you. But, often they do offer index funds. I usually put my money into one of these and just leave it alone. The expense ratios are generally cheaper since all they do is buy the stocks in the index. And you don’t have to worry about underperforming the index since it is the index.
As I mentioned in my previous post, Do you know the difference between a 401(k) vs. Rollover IRA vs. Roth IRA?, I like to just move my 401(k) to a rollover IRA anyway when I change jobs. This gives me many more investing options investing through my brokerage account.
Good luck and happy investing!
