Investing In Mutual Funds: Where’s Your Edge?

I like the idea of automating your payroll deductions to jack up your retirement savings account, such as your 401k. This type of forced discipline is very helpful, and I’m not putting you on. Sometimes it takes automatic deductions to get you going until you get the feel of it – literally and figuratively.

What I don’t like are the investment choices you’re given to hold your money. All of them are mutual funds and all are long-only. Now, you can model yourself after Gil Blake – and I encourage you to do so. He was featured in New Market Wizards for having masterfully traded his account using mutual funds, so it can be done. But like anything in life, you have to make an effort, you have to persist and be determined.

Here a list of things I don’t like about Mutual Funds. They are the same reasons why you might consider wanting to become a trader – someone who is skilled in risk management. I’m not concerned with debating the salient points of market timing yet…I’m doing that in an upcoming post. Just get your arms around some of these features/characteristics of mutual funds:

– Long Only vehicles

– have to be 75% invested at all times

– they are over-diversified: you need 12 stocks to be diversified. Why own 60+ stocks inside a fund – one fund? How many funds does one own?

– no liquidity b/c of forward pricing

– no risk management b/c of forward pricing

– leverage of 2:1 after 30 days in taxable accounts, none if in a retirement account

– no transparency

– fees can be less than clear

– 7 out of 8 managers underperform their benchmarks

If nothing else, you should be encouraged that these are professional managers we’re talking about. I see these bullets as handicaps.

Answer this question: How many people do you know who have become wealthy by investing in mutual funds?


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