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Mutual Funds, Updated! September 2, 2008

Posted by shaferfinancial in Uncategorized.
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Morningstar published an interesting statistic recently.  It looked at the universe of mutual funds, all 2100 of the public funds, and found that 17 have a positive rate of return for the last year.  That means that 0ver 99% of all mutual funds lost money.  Now the question for you is why the financial press isn’t screaming this amazing fact out to the public.  They don’t have to, of course, because outflows from mutual funds are at a all time high.  People are reacting as we expected and selling.  They do it every down market.  It is more pronounced now, because of the large demographic group approaching retirement.  Simply, reality is setting in for these folks, and they are panicking. In one week in July, people pulled out over $11 Billion. Two weeks ago over $5 Billion outflow.  This has been going on for about 6 months.  Now mutual fund equity managers are having a problem, because there is so much outflow that they don’t have an ability to shop for bargains in the market.

This is what happens when folks are told that a) mutual funds use diversification to reduce risk  b) mutual fund investors will get a 8%, 10% or even 12% rate of return, and,  c) we are the experts, you won’t/can’t become your own expert so let us invest your money for you!

It bears repeating, no one will take care of your money like you will.  You need to learn what risk is and what it isn’t.  Managing risk is really not that hard once you understand it.  You need to learn what type of investments work best for you.  You need to take responsibility for your own financial health.

Mutual funds are a way most people push off that responsibility to someone else, usually a sales person that knows not much more than you.  Diversification reduces your expected rate of return to a point that you are unlikely to do much more than beat inflation.

And here is another thought.  All those folks closing in on retirement might not trust the market enough to put their money back in.  If this happens, then the mutual fund managers will be hard pressed to do anything but sell, missing out on buying opportunities.  I’m not saying its going to happen, just that it is in the realm of possibilities!

 

******Remember, this post and blog is for amusement only and represents the opinion of a person not licensed to sell mutual funds.  Do your own research before performing any financial advice or purchasing any financial product!**********

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