Make that: Aside from the issuers and managers, does anyone ever profit from investing in mutual funds? I'm aware that there are ups and downs in the price, so it is theoretically possible to buy low and sell high, but mutual funds target people that don't know how to calculate what is low and what is high. (If they knew that, they would probably cut out the middle man.)
Now, I've been burned twice by company matching plans that encouraged the purchase of mutual funds that fared poorly, so I have a pretty negative impression of the things. However, it seems that there a number of systemic problems with mutual funds that make them virtually guaranteed to lose money.
- Mutual funds never turn away investors. Even if a fund manager believes that there are no good investment opportunities, people are still allowed to purchase more shares of a fund. If those purchases were kept around as cash, they would simply dilute the profits of the earlier investors. However...
- Mutual funds can't hold large sums cash. It says in the prospectus what the cash percentage target is, and you can be sure that every dollar beyond that is going to be invested in something, regardless of how overpriced the market might be.
- Mutual funds are stuck with a defined category of investments. This makes it much more likely that your money is being put in mediocre (at best) investments.
- Mutual funds take their two percent (or so) every year regardless of performance. OK, this one everybody understands. But it means that in order to make average returns, you will have to have better than average market timing. And again, mutual fund investors are taught to buy regularly and hold long - not to learn enough to predict bottoms and tops.
2 comments:
The idea with retirement funds is that you're investing for the long term not the short term and that you're getting dollar cost averaging assuming that you're putting money in every month. A
To answer your question: yes they do and as anonymous suggested, it is over the long-term. See this related post for more info: http://mutualfundsinvesting.blog.com/4748146/
Secondly, your employer encourages investing in mutual funds because nowhere, in any other investment can you find a broad based portfolio. And it is their obligation to see that you are doing something for your future.
Third, all mutual funds have done poorly over the past year - but then again, so have almost every stock and bond, save for Treasuries and they, according to Roger Lowenstein in this past weekend's New York Times Magazine, are also poised for trouble.
Fourth, paying a fund manager 2% is too high when similar services can be had for much less. Yes they get their money no matter whether they win or lose, but consistent and unexplained losses don't reward them with tenure in most cases or new shareholders.
So don't give up on something you only have passing knowledge of. Instead, gain more info and make decisions that you have not made: how much risk can you tolerate, how much money are you investing and, more importantly, why.
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