Are Mutual Funds a Good Buy?
Well, that’s a loaded question. 401(k)s are almost all filled with mutual funds. It’s the easiest way for an employer to assist you in diversifying your portfolio. There are also fees that can be passed on to the employees (you). Money Magazine has an annual list of the top mutual funds. Portfolio managers are getting celebrity status, till they fail.
Most folks only see one other, costly, alternative; individual stocks. Yes, in order to mimic a mutual fund you would have to buy individual stocks and bonds (50 to over a hundred) and have the time and skill to actively manage the portfolio. Both can be costly, but mutual funds are definitely easier without having to manage the stocks and bonds inside of the funds. The issue is the fees. Mutual funds are not cheap. Even those highly touted no-load funds. Yes, even those have fees built in. You do have to go over the prospectus with a fine-tooth comb to find them but they can, and do, go up to 3% or more. Some advisors even have to charge a management fee for a portfolio of mutual funds. No kidding! They actually sell you a portfolio of funds that each charge a management fee of upwards of 3 percent and then the representative charges you another 1 to 3 percent on top of that to manage the portfolio of an already managed portfolio! **
Some think that if they buy several different mutual funds, they will have greater diversity in the portfolio. Maybe not; for example, two fidelity funds, Large Cap and Large Cap Growth Enhanced, actually contain 107 of the same holdings resulting in the Large Cap Growth Fund being held in the Large Cap Growth Enhanced Fund. If, in an attempt to diversify and manage risk, a mutual fund investor-owned both the Value and the Growth funds, that investor could actually be increasing risk!
Another issue with Mutual funds is that if you would like to sell one, you won’t know what the net price will be until the market closes. Do you like unpredictable outcomes? Wouldn’t it be nice if advisors were fee conscious? What if portfolios were designed with safety, fees, and taxes in mind, as well as your dreams, goals, and aspirations at heart? So, what do we prefer for the actively managed portion, instead of mutual funds? We use a well thought-out and revisable portfolio of Exchange Traded Funds (not to be confused with mutual funds). These ETFs have no internal fees. They are static investments that trade like a stock while the market is open. We like ETFs that are relatively stable and throw off higher than average dividends. For the larger portfolios, we will extend the holdings to an individual stock, typically Blue Chip stable companies that, again, throw off higher than average dividends. We understand that most of our clients are in the income phase of life and for that reason, we recommend tools with predictable income See a theme? Safety, low fees, actively managed, and seeking higher than average yields. Together with guaranteed, no risk investments, we create, employ, and actively manage a winning combination.