Mutual Funds Are Dead – But They Don’t Know It

By Al Thomas

If you own any domestic or foreign mutual funds it is time to jump ship. When the cover of the most prestigious financial publication in the world – Barron’s – publishes a bullish article about funds it is a red flag for all fund owners.
Their cover story was about a former fund manager (I won’t mention his name to stop additional embarrassment) who had a great return for many prior years and then during 2008 lost 75% of the fund’s value. It went from $80 to $20 per share. Their hip, hip hooray story was about his climb back to $37 which is $10 per share less than it was 10 years ago. Let’s see, his investors are now still out more than 50%.

You might want to stop reading at this point to check on your mutual funds to see where they were selling 10 years ago. I’ll wait.

You say I am being unfair because they paid a lot of dividends during that time. Yes, many did. And, hopefully they kept investors ahead of inflation.

The major complaint with investors is they don’t know when to sell so they can keep their profits and not give them back. Of course, that is why investors give their money to others to manage. No fund should ever lose large sums of money. Any loss more than 10 or 15% means the fund manager does not understand risk management. Investors should never have their money with this type of manager.

Fund managers made a great name for themselves from 1980 to 2000. During that time a monkey with a dart board could have made big profits. The monkeys never learned how to keep the profits they made. Neither did the fund managers.

Mutual funds are now competing with Exchange Traded Funds, ETFs. Last count there were almost a thousand of them. Their expense ratios are as littler as 1/10 of standard mutual funds and they can be traded the same as stocks. An investor can put an open stop loss order to limit his loss that cannot be done with regular funds.

There are no required holding periods called redemption fees. Some mutual funds penalize investors as much as 2% if they sell prior to a certain time period. It might be a month or a year. This is done to keep investor money. Fund managers are paid by the amount in their fund and not on how much they make. There are even redemption fees on some no-load funds.

Brokers want to sell mutual funds because there is a hidden fee every year beside the first year commission. Most no-load funds will outperform load (commission) funds when the commission is factored in. Don’t get suckered into the “long haul” story.

As investors become more aware of ETFs they will take their money out of mutual funds and switch to ETFs. There are ETFs that match fund performance and then investors can protect against poor fund manager performance with open stop loss orders.

Time to trade in your Model T for a Corvette

Al Thomas’ book, “If It Doesn’t Go Up, Don’t Buy It!” has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at and discover why he’s the man that Wall Street does not want you to know. Copyright 2009 Williamsburg Investment Co. All rights reserved.

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