I am interested on investing....which would be better to invest in... your feedback is appreciated.... Mutual funds are appropriate for some and the wrong investment for a growing number of people.
Put another way, I would NOT invest in mutual funds if it weren't for having a 401K.
Overall, Mutual funds are not good (once you're educated about them) and you should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).
Here's why.
First of all, mutual funds exist to take average person's money.
Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. As was stated over 60% of the mutual funds out there can't even outperform the market. That's VERY SAD!
Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually.
Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT "losing" you lots of money. That way you stay with them and they continue to collect their fees.
Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.
Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.
Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).
Convniced yet? Need more?
Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc. or right now, Healthcare, Retail, and insurance!
Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like microsoft, at&t, home depot, cisco, ebay which have been sideways for years? I think not.
A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but without the extra overhead!
See amex.com (american stock exchange) or ishares.com, holders.com for more info.
You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many).
Let me know if you have further questions.
Best of luck! When you buy a mutual fund you pay an entry fee, often an exit fee and money is taken from the fund as manager fee. In exchange you have to count on the expertise of the manager to do better than the stockmarket to compensate for the money you lost on fees. Admittedly there *are* funds that do better and have even stellar performance. But they are rare and they are difficult to find.
You can do much better by investing in Exchange-traded funds (or ETFs). Like mutual funds they are open-ended collective investment schemes. But the difference is that they are traded as shares on most global stock exchanges. Typically, ETFs try to replicate a stock market index such as the S&P 500, a market sector such as energy or technology, or a commodity such as gold or petroleum. As they are index link there management fees are much smaller than those of MFs. And because they are traded as shares, you only pay broker's fees which are also much lower. The primary issues between the two are two: (1) asset management, (2) operating costs and fees.
With most mutual funds, they are actively trading their capital and while some is churning in order to gain higher expense costs to be covered by the mutual fund share holders, some is to gain some market advantage. Mutual funds can make more on a similar set of stocks than an ETF because of opportune buying and cash management. ETFs, meanwhile have committed to holding relative equal positions, period. The only turn over is to put new cash to work when money coming in exceeds the net asset value of the fund by some noticeable amount.
Since the costs for owning the same stocks is usually lower, more of your money goes into, and stays in, a set of stocks. Think of it as the same kind of advantage as investing in a bank that compounds interest monthly or compounds interest daily. You possibly can get more bang for the buck.
Still, it depends on which mutual fund and which ETF you are comparing. There are oodles of both. I would recommend you look at Vanguard, Putnam, and Dodge & Cox. The first two have low expense rates, the latter exceptionally stable long-term management of funds. Yet, the Ishares has a really good set of offerings, really cheap but very effective. Look for yourself. |
