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Thread: Things to keep in mind about Mutual Funds (article)

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    Temporarily Banned Vaughn's Avatar
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    Default Things to keep in mind about Mutual Funds (article)

    This comes from The Motley Fool - Investing Strategies
    By Paul Elliott

    Mutual funds may be just the thing for you. But they're an expensive way to invest, so if you have even the slightest inclination to "do it yourself" -- and make a lot more money -- you'd better read this.

    I just want what's coming to me!
    With the possible exception of local property taxes, no mechanism known to man picks your pocket more efficiently than the United States mutual fund industry. And yes, that includes the dreaded IRS.

    How so? Well, Uncle Sam takes a piece of every penny you earn, and that's a sorry state. But your mutual fund manager does worse. He's not content with his cut of what your money earns each year (we'll assume for now that he actually makes you money). No, your fund manager wants more -- much more.

    When I tell you how much more, you may not believe it. So I'll warm you up with a quick example.

    Wahoo! My fund manager's a genius!
    The year is 1990. The economy is stagnant, Saddam Hussein is rattling his saber, and President George H.W. Bush assures us that "this will not stand." You just dumped $10,000 into the greatest mutual fund in the history of the world.

    That's because your fund manager doesn't buy the gloom and doom, and he doesn't buy diversification. He buys technology. He rolls the dice on just three stocks: Microsoft (Nasdaq: MSFT), Dell (Nasdaq: DELL), and Oracle (Nasdaq: ORCL).

    You hit pay dirt! Now it's New Year's Day 2000, and just look at what's become of your $10,000 stake (before expenses):

    Microsoft: $313,395
    Dell: $2,833,333
    Oracle: $155,611
    Your total assets under management could be $3.3 million! But mutual funds have a price -- and it may be a lot higher than you think.

    Your $10,000 isn't worth $3.3 million!
    Assuming your fund manager hits you up for a 2% fee (while not cheap, it's also not unheard of), you would owe roughly $55,000. That seems fair enough. After all, the fellow just made you $3 million.

    The math-inclined are probably saying, "Wait, $55,000 isn't 2% of $3.3 million." That's because there's a catch: You pay your fund manager every year.

    By New Year's Day 2000, you'd actually have paid your fund manager nearly $130,000 in fees, costing you more than $600,000 in gains. That's a high price, but it gets worse.

    Imagine if you'd invested $20,000 instead of $10,000. You'd be paying twice as much! And what do you get for all that extra money -- for paying twice as much? Not a darn thing, as far as I can tell.

    Oh, yes, it gets worse still
    Now, what if it turns out you're paying for nothing? I mean, let's face it, you're not going to buy into a miracle fund like the one I just described. Your fund manager won't be a genius. More likely, he'll be an Ivy League MBA looking to keep his job and follow the herd -- or worse.

    Don't believe me? Look no further than the list of widely held institutional stocks. I guarantee you'll find at least two of the three we just discussed, plus General Electric (NYSE: GE), Intel (Nasdaq: INTC), and ExxonMobil (NYSE: XOM). Now, run down the top holdings in your mutual funds. See anything familiar?

    Worse, even if your fund manager did stumble on Electronic Arts (Nasdaq: ERTS) or some other stealth 1,000% gainer, what are the chances he would actually hold on for the entire ride? More likely than not, that fund manager of yours would have bought and sold it many times over. You guessed it: In addition to the outrageous annual fee, you'd have paid taxes and transaction costs!

    There may be a better solution
    I recently looked at Mark Hulbert's July 2006 audit of the results for some of the nation's top investment newsletters. According to Hulbert Interactive, the stocks David and Tom Gardner have recommended in Motley Fool Stock Advisor have returned 22.8% annualized (versus 5.8% for the S&P 500) from the newsletter's 2002 inception through July 2006.

    For the sake of argument, let's say you earned precisely that return for the next 20 years. If you managed to sock away $500 a year, you'd wind up with $161,564. For that, you'd pay the broker commissions (say, $10 a trade) plus the cost of your annual subscription.

    That might sound like a lot, until you compare it with what you'd pay to own the same stocks in a mutual fund. In fact, all those expenses added up over 20 years would pale in relation to the nearly $3,000 you'd pay your fund manager ... in the past year alone! All told, you'd pay more than $15,000 and forfeit $50,000 in gains.

    So, you see why the IRS wants in
    After all, in any given year, the IRS can tax you only on what you earn. Your mutual fund manager takes a cut of everything you have ... year after year after year. In other words, even if you don't make a cent in year 21 of our previous example, be prepared to hand over another $3,000.

    For all that, it's just possible you have no interest whatsoever in buying, much less researching, your own investments -- even with the help of a newsletter service such as Stock Advisor. If so, mutual funds may be the only game in town. It definitely beats staying out of the market, but you can agree it's a broken model.

    Here's something to at least consider
    If you balk at buying some guy you don't even know a house in the Hamptons, try Stock Advisor free for 30 days instead. David and Tom can't guarantee you 22.8% every year -- or that they will always thump the S&P 500 by so much. But that's their explicit goal, and it's something 75% of mutual fund managers don't do.

    Best of all, as your portfolio grows, your costs won't. It won't set you back two grand a year to join the $100,000 club ... and it won't cost you $120,000 a year to be the $6 million man (or woman). That should be your goal, after all -- and it sure isn't one you should approach with mixed feelings.

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    Default Re: Things to keep in mind about Mutual Funds (article)

    dont know too much but i agree, fees are too high. and perhaps there is too much buying and selling inside of the fund. i expect the motleys fools to be more concise though.

  3. #3
    Jay Zeno
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    Default Re: Things to keep in mind about Mutual Funds (article)

    Warning: This is not good. The copyright information for that site is contained here:

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    Default Re: Things to keep in mind about Mutual Funds (article)

    You are not allowed to post full articles on SW. Only a bit of the article with the link for the rest of it.

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    Default Re: Things to keep in mind about Mutual Funds (article)

    This isn't an article. Its a salespitch for this Stock Advisor! There are so many holes in this article, I can't tell which one to start picking apart. Arrgghh...my clients bring me drivel like this.....

    Ok, just to keep it simple.
    1. Yes, mutual funds may not be the most inexpensive investment vehicle. BUT...There are plenty of smarter, less expensive ways to invest besides paying a 2% annual wrap fee ongoing. The article is looking at only one scenario in order to hyperbolize the situation.

    2. How many months does it take for the average person to learn about how the markets work, functional analysis, technical analysis, etc? How many hours a day does the average person need to spend following interest rate and market trends? How many years will this person have to keep doing this, and how quickly will THAT get old?

    Not everyone here is as astute as Melonie, or as interested in being active in the markets.


    3. The only investors that consistently beat the market are those at the top. CEOs of large companies, Warren Buffet types, etc. Why? They have access to the most information? Who has more access and time, your average stripper or computer programmer? Or a 10-year + tenured mutual fund manager?

    4. There is no crystal ball. Market timing represents only 6% of overall porftfolio success over time.....


    I can continue, but it doesn't matter. This is just an advertisement anyway.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Temporarily Banned Vaughn's Avatar
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    Default Re: Things to keep in mind about Mutual Funds (article)

    It is? Oh crap. I think the fees are too high so I when I got this in my daily alerts I thought I'd share.

    Glad to have someone working in the field like Katrine around to catch that kind of thing


    PS- I didn't post the whole article/ad or whatever (most of it though) and I gave credit to the author trying to not violate any copyright stuff. But I'm off to read Jay Zeno's link now to better educate myself in the event I post anything else from that source. Thanks to Jay as well.

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    Banned Katrine's Avatar
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    Default Re: Things to keep in mind about Mutual Funds (article)

    Ways to invest in mututal funds, etc...

    1. Loaded Funds, aka A B C Shares. You pay a load upfront, inback, or a little each year. B Shares are actually pretty shitty, and the SEC has come down on them. A vs. C, depending on your time horizon (how long you want to invest). They live in a brokerage account. You may or may not incur transaction costs, depending on if you move in or out of a fund family.

    2. No-load funds and ETF. Less fees, managed by a big computer instead of a bigwig in a suit with a staff of analysts busting their asses. There are some good options here, but they tend to follow their corresponding indexes. This may appeal to some, but there are enough really good actively managed funds that kick the crap out of ETF's even AFTER fees and loads. These also sit in a brokerage account wherever you choose to invest.

    3. Wrap Account. You pay a broker/advisor to create and manage a portfolio consisting of active funds, passive funds, etf, stocks, bonds, etc... The fee various based on brokerage house, needs of the investor, and assets under management size. There is DEFINATELY room for unethical practices in this area. If investor is paying a wrap fee, they do not pay for trading and transaction costs, or loads. The fee depends on multiple variables. Even within my firm we don't have set fees.

    This doesn't mean that any investor is likely to get hosed by every financial professional.

    a. Properly registered representatives must comply under NASD law, and with "fiduciary duty" to their clients. You can read the NASD website if this particularly interests you.

    b. An informed investor DOES have bargaining power!

    c. There are suckers and scam artists everywhere. The writers of the article smell like scam artists to me.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
    "And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion

    Quote Originally Posted by Mia M
    If a cupcake was tossed at me... well, I'd only be upset if it missed my mouth

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    Temporarily Banned Vaughn's Avatar
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    Default Re: Things to keep in mind about Mutual Funds (article)

    Awesome addition to the topic!

    You should Mod this section , Kat

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    Default Re: Things to keep in mind about Mutual Funds (article)

    this is a bit dicey from a Copyright standpoint ... however, since this material is also posted on a free area of the Motley Fool site, since the author and Motley Fool and the article's author have been credited, and since SW is merely hosting member-posted content rather than webmaster posted content, it probably falls within the 'fair use' doctrine.

    While the article does indeed use some extreme worst case examples to make its point, for a fact the basic point is true ... that mutual funds do charge their investors 'management fees' and/or 'load fees' as a means of compensating the costs of the fund's management, investment research, operating expenses etc., and that these 'fees' can represent a significant additional cost.

    As Katrine points out in a general way, investors who are relying on professional investment advice wind up paying for that advice ... whether that takes the form of indirect payment via mutual fund 'fees' or direct payments to an investment advisor. Over a long time period, if average market returns are 6% and investment advice costs 3%, an 'average' investment advisor winds up making just as much money for themself as they are making for you.

    For this reason I am personally not much of a fan of mutual funds. However, as was also pointed out in a general way, there are certain situations where a small time investor simply does not have access to the financial data and/or the time to digest that data, such that 'paying a professional' may be worth it. I have personally owned mutual funds which specialized in stocks from countries outside of the US and Canada, partly for the management and partly to avoid having to pay super-high commissions for direct stock trades on the Hong Kong, Brazilian ,Thai stock exchanges.

    There is also a fair amount of previous SW discussion on the topic of mutual fund 'loads' ... for starters.

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    Default Re: Things to keep in mind about Mutual Funds (article)

    It doesn't matter what another site says. It matters what Pryce says about his site...No full/almost full articles (so in other words, the way you did it was wrong). You post a snippet of the info you want people to read and leave the link for others to read it. Any other way than that, you'll have your post modified, get warning points, and if you keep doing it, get banned.

    Respect Pryce's rules for his site.

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    Default Re: Things to keep in mind about Mutual Funds (article)

    Got it, VG. Thanks

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    Default Re: Things to keep in mind about Mutual Funds (article)

    Anyone who hasn't done research into examining the expenses and tax consequences associated with any investment, really has no business getting into that investment, and barring fraudulent practices, nobody to blame but themselves when things go wrong, or not as right as they could have.

    The information that can help educate them on these matters is out there, and often for free no less.
    Former SCJ now in rehab.

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    Default Re: Things to keep in mind about Mutual Funds (article)

    ^^^ absolutely true ! Especially when you fall in one of the higher tax brackets, the tax ramifications of different types of investments can mean just as much in regard to 'total after tax rate of return' as the investment itself.

    Where real estate mortgages are concerned, there are a number of large risk factors that are seldom talked about. The first is that despite the fact that you are signing on to a 20-30 year mortgage obligation, there is absolutely no guarantee the mortgage interest paid will remain tax deductible for that entire period. Second is that despite the fact that you are signing on to a 20-30 year mortgage obligation, there is absolutely no guarantee that property taxes will remain in the same ballpark (lots of horror stories about property formerly zoned as rural / suburban suddenly being hit with huge urban property tax rates as the area around them develops). Third is that despite the fact that you are signing on to a 20-30 year mortgage obligation, there is no guarantee that the local economy will remain healthy thus market prices for rent will remain stable (lots of horror stories about one large local employer closing up, former employees moving elsewhere, leaving behind a very soft real estate and rental market).

    While not quite so volatile, the same situation does exist for mutual funds. For example, if you think that you can avoid state taxes by purchasing shares in mutual funds that are 100% comprised of tax exempt muni bonds from your state, rrrrrrr - wrong answer (for some such funds at least). Same sort of principle applies for depletion allowances on (some) mutual funds comprised of gas and oil stocks, alternative energy investment tax credits for (some) mutual funds specializing in this sector. If you're thinking of getting into tax favored mutual fund investments, you REALLY have to do your tax homework.

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