Should You Invest in Mutual Funds?

Should you invest in Mutual Funds? There are lots of theories on why you should or should not invest into Mutual funds. Personally I don’t buy mutual funds, and for good reasons, their past performance stinks.

If you look at the past somewhere around 90% of mutual funds fail to beat the market on average. That means if you go out and buy the 500 largest companies in the US without doing any research you will be doing better than most of those actively traded funds that are managed by those high level professionals.

There are a few realistic reasons why mutual funds underperform.

1. It’s a Job

Every fund manager has to report their holdings. Most of the time, this means that they have to be more concerned about keeping their job rather than investing into strong companies.

So, many managers will play it safe and invest into large companies that don’t have much growth potential, but are considered safe. No one ever lost their job by investing in Coke.

2. Over diversification

Diversification can be great, but you don’t need to invest into 700 companies across 50 countries to get it. I can’t find 700 great investments, I don’t think anyone can.

3. It’s a Sales Business

The biggest concern of every business is to market their product. Without marketing no one comes. So, the number one concern of most funds is to market their fund, not to make higher returns.

4. Fees

Mutual charge fees, which further lower the percentage, return that you can make off of your investment. More fees = less profits.

Alternatives

If you have time to actively manage a stock account and do your research it can definitely be worth it.

If not the next best option may be to invest into strong ETFs. ETFs are basically a grouping of different stocks all rolled up into one investment.

The S&P (SPY) is one example of this. The SPY ETF is just a combination of the 500 largest companies in the US and considered to represent the market average. Once more it beats nearly every mutual fund out there.

So, it is a way to get a decent return without having to spend the time to actively manage your account.

Still Looking For Mutual Funds

90% of funds fail to beat the market, but 10% do. Some funds actually continue to make higher returns year after year. There are various studies out there to find them, but basically the past performance is really what most investors care about.

By looking at how a fund performed over the last 15 to 20 years you can get an indication on how it will perform in the next 15 to 20 years. Even so there is a reason funds have to say, “Past performance does not guarantee future results.” So, be careful.

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