Top 5 Reasons Why Mutual Funds Fail
1. Mutual funds charge a fee, the Management Expense Ratio (MER), to cover their expenses. An MER virtually guarantees that mutual funds will lag the stock market performance. In a previous post I discussed the high cost of mutual fund fees.
Selling at the wrong time
2. A mutual fund will drop in price if a large number of mutual fund holders decide to sell their funds in a short amount of time. This is especially worse during a market downturn, at which time everyone runs to their mutual fund company to redeem their money. This forces the fund manager to sell (in order to refund people their money) even when some stock holdings might still be undervalued and worth holding on to, this is a disadvantage to current mutual fund holders who do not wish to sell.
3. You pay taxes on any capital gains incurred by the mutual fund annually; even if you don't withdraw any money that year.
4. Can you really get unbiased advice from mutual fund sales people who work for and earn commissions from their respective mutual fund companies?
Everyone gets paid except you
5. “Most mutual fund companies are paid based on how much money they manage rather than on how well they manage it. The brokerage firms control the money. In order to have access to the trillions of dollars that the brokerages control, mutual funds buy “aggressive” investments, pay some of the brokerages’ expenses, and even offer kickbacks every three months! They do this-and more. Of course, it’s no sweat off the mutual fund company’s back because they’re all doing this with your money! So long as your brokers and advisors can convince you to “stay in it for the long term” and scare you into the “safety” of diversification through their mutual funds, everyone will keep getting paid. Except you.”*
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*”F Wall Street” by Joe Ponzio, page 7