Tell tale facts about mutual funds

Are you invested in mutual funds? The likely answer is yes. That’s because Wall Street has very successfully pitched mutual funds inside 401K wrappers as the primary means of retirement savings for at least 30 years. This is despite some astonishing information about mutual fund providers.

Did you know that there is over $12 trillion invested in mutual funds? That doesn’t indicate the success or failure of mutual funds, only the magnitude of the situation at hand. After all, there is a lot of money invested in cash value life insurance. Many top executives at large companies provide over funded life insurance policies to their executives as part of their compensation package. At the same time, some of the companies have their salespeople preaching “buy term and invest the difference.”

The average salary for a mutual fund manager is $240,000/year. I have no quarrel with someone making a good salary, since I applaud successful entrepreneurs being rewarded for their efforts and choices. But where this really starts to lose ground is the fact that 15% of these directors stay in the business for 20 years or more. They come back, year after year, and keep managing funds, whether or not they did well. You see, their measurement on how well they do isn’t 100% based on how well you or I do. A significant factor is whether or not they made good sales. Did they keep enough clients from the previous year, or in turn, gather enough new clients. Either way, if the fund itself takes a nose dive, it shouldn’t be an assumption that the fund manager gets fired. If that were true, the turnover would be huge.

61% of mutual funds have lagged the S&P 500 over the past five years. This is where Wall Street’s message of “find a financial investor” gets spelled out crystal clear. In one breath they say, “odds are against you picking a mutual fund that will succeed. You need an advisor.” And then the next thing they say is, “but we can pick a good mutual fund. The odds are NOT against us.” The odds cut both ways. If you are looking at hiring a financial advisor, ask for a listing of every client he or she has had for the past 10 years, and their overall performance.

Let me say that again: ask for their client’s performance. If your potential advisor tries to tell you the 10-year performance of the funds he or she suggested, don’t accept it. You aren’t evaluating whether the fund works. You are evaluating whether his clients succeeded using him.

Another tragic fact of mutual fund companies is that most of the oversight controls are in house. They may have a separate board in charge of oversight that doesn’t directly pick the funds, but this is still under one roof. Now we may look at people like Warren Buffett and Berkshire Hathaway and try to ask, “what is the difference?” After all, Warren Buffet and his board essentially decide what to buy and sell. They own either in part or entirety, over 70 companies.

What’s the difference? A huge one. Berkshire Hathaway has annual shareholder meetings and have votes. Shareholders can vote out board members, even Warren Buffett himself, if they aren’t doing their due diligence. Past members of the board have left due to various differences. This bodes for true accountability to the shareholder. Mutual funds don’t have shareholder meetings. There are not votes. The board put in place makes all the decisions, and the company board overseeing them don’t answer to you either. They are on the hook to answer to the SEC, but when is the last time that the SEC prevented a major fiscal disaster?

Another major difference between mutual funds and owning the same equity in Berkshire Hathaway is what happens when people want to dump their holdings. When you own a mutual fund, you don’t really own stock. Instead you own shares in a fish bowl of equity. When you ask for your piece, they must empty out the fish bowl. Due to their strategy of investing, they may be forced to sell lots of stuff, good and bad, to pay you out. When a lot of people dump their holdings due to a downturn, they have to cash out a lot and take bad losses. It is hard for them to simply sell the most profitable stuff and allow you to share in the good fortune. That’s because a huge portion of the equity of a mutual fund is kept in stocks and bonds (or whatever else they are investing in). Very little is kept in liquid cash.

When you sell a chunk of Berkshire Hathaway, you aren’t asking Warren Buffett to unload any stock. Instead, you are asking another investor to buy your shares at whatever the current trading price is. There is no middle man in this respect the way there is in a mutual fund. Maybe they picked up some bad stocks, maybe their good, but your panicky nature during a downturn doesn’t directly force Warren Buffett to unload good stocks just to meet your liquid needs.

Does any of this sound like the stuff you heard the last time you chatted with a professional mutual fund advisor? I didn’t think so.

To sum things up, mutual funds have been very profitable for the companies. That is probably why the managers can keep their jobs. It should be a tell tale sign that when mutual fund companies keep the same people for decades, their lack of ability to police costs and serve your needs not of serious concern. Actively investing in your own strategies and seeking out products that meet your wealth building needs requires constant, active research on your end. Handing this off to someone tilted towards merely finding the “best” mutual fund for you won’t cut it.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.

4 thoughts on “Tell tale facts about mutual funds”

  1. I have questions about 401Ks. In advance: I’m totally illiterate in this area, and I also wasn’t aware of fess.
    You mentioned somewhere (I cannot find it now) that 401K is taxed. I don’t understand that: I thought that the point in 401K is that you can use it only for retirement but it should be almost tax free, or extremely low tax (I don’t count the fees now). So how much will it be taxed?

    Another new thing:
    The website states that the politicians will “cut” your 401K, but in reality it seems that they lowered the contribution limit. That won’t affect me: it’ll affect only wealthy people so they cannot put away too much money in a ‘tax free’ manner into 401K. Am I thinking correctly? If that’s true, than the website is misleading. Lowering the contribution limit won’t mean that they’d take anything existing stuff away, but sometimes they suggest that on the website.
    It’s a whole other issue how much the 401K worth saving. After your blog I’m skeptical and thinking…

  2. On the other hand the questions is how much money should I save for keeping my current living style. There are many calculators, but often the defaults are too optimistic. It really matters how much is the inflation ratio (and some calculators use that ratio to automatically assume a salary increase by that rate – hahaha), and if I retire at age 65, I ideally want to live for another 30 years. So if I’m 35 years old now and just start saving, I basically live exactly as much after retirement how many years I’ll use to gather the retirement fund :O! Basically it’s like having an extra virtual family member (me at my old age) and saving the money he’d need. Same for my wife, another extra virtual family member.

    I’m really skeptical about retirement in general. I think we are fortunate that software development profession can be done sitting in a chair, even at retirement age. Given that my brain will be fresh enough to do that and I won’t have dementia I’m ready to work even at old age.

  3. 401K plans are not tax free. They are tax deferred. This means that while you save money with pre-tax dollars, when it comes time to draw funds in retirement, those dollars will be taxed as standard income. Imagine you were saving $10,000/year and with a 25% bracket (just to keep things easy), you would effectively be saving $2500/year in tax breaks. You keep doing this over a span of 32 years. That comes to $320,000 you invested. In all that, you have so far avoided paying $80,000 in taxes. Now let’s assume your investment of $320,000 grows into $1 million. It won’t because 401K funds haven’t historically been huge growers of wealth, but let’s assume it will. So, you have $1 million. The industry standard recommendation is to withdraw only 4% to make that pile of money last. That would mean you get to withdraw $40,000/year. And it’s taxable. With the same tax rates, you would lose $10,000/year to the government. In 8 years you will have paid up the total amount of tax you deferred while saving for 32 years. Sound good? Didn’t think so. If you were to instead start drawing $80,000/year instead, you would burn up your tax savings in four short years. Yuck!

    Regarding will congress go after 401k plans, well no one knows. My crystal ball is still in the shop. I have heard that some congressmen are talking about taking a one-time cut, but political winds are always changing. Let’s just that, that if they did, it wouldn’t surprise me.

    Regarding the term “wealthy,” there are other opportunities like Roth 401K funds and Roth IRAs. That is where the dollars you invest are post-tax, meaning you pay the taxes this year instead of during retirement. I am generally more in favor paying taxes now rather than later, because it reduces my risk to unknown tax rates in the future. I have money in a Roth IRA, which I used to buy a handful of stocks (not mutual funds), but the cut off for contribution is $150,000/year salary. If you make that or higher, you are considered too rich to be putting money into Roth IRAs. Roth 401K and plain ole 401K plans have a max limit of $17,000 this year, and that limit rises each year. But ask yourself, is donating the max, $17,000/year for 32 years (totaling $544,000) enough? If not, then something is wrong.

    If you like, check my links underneath “Rebalancing My Portfolio” to see the strategy I am currently using. And by all means, start tracking all your investments and liabilities with a spreadsheet to see if your net worth really is growing (

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