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Mutual Funds; Redux October 7, 2008

Posted by shaferfinancial in Uncategorized.
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By now all the people who own mutual funds are either in full scale panic or are trying their best to put it out of their minds and do what Wall Street advises; make no changes.  The mutual fund money managers however are not quite so lucky.  When there are large net outflows, as there are now, they have to sell to cover the redemptions!  So while Wall Street might advise not selling to its mutual fund owners, the managers don’t have that luxury.  The question is, of course, what to sell?  Index funds have to sell evenly to keep their ratio’s the same as the index they are mirroring.  So for them they sell all companies, whether they are doing well or not.  The managed funds tend to sell their losers locking in those losses.  After all if you were reading a mutual fund prospectus you might be alarmed to see banks and investment firms represented.  So out go the out of favor industries and companies, no matter whether they might be good investments at current prices or not!

For those of us who are not in mutual funds, we can make individual decisions based on the fundamentals of each company we own, and not lock in losses unless we think the something has changed to make these companies prospects poor going forward.

For me, I will make no changes, since both Berkshire Hathaway and my REIT are actually up since September 1 and I see nothing fundamentally changing the prospects of these two companies.

Having control of one’s investments should be what folks strive for.  I have friends who have sold their equity mutual funds in favor of bond mutual funds inside their retirement accounts.  This is the only choice they have other than to go to a cash equivalent.  However, as the data demonstrates this attempt at market timing will fail.  Unfortunately, their choices are limited inside that retirement account.

This is perhaps the worst factor in the current strategies most people employ.  I am not a big believer in 401Ks and IRAs for two reasons.  First, you will most likely end up paying more taxes in the long run than if you invested outside of the tax deferred accounts.  But more importantly to the current situation, you are limited to what you can invest in and have to pay hefty penalties to get at YOUR money.  And I don’t want anyone controlling my money, especially not the geniuses on Wall Street! They got their bonuses, and what did you get?

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Comments»

1. Tom Vanderwell - October 8, 2008

Hey Dave,

I understand exactly what you are saying about 401k’s and IRA’s paying more in taxes in the long run. I wondered if you ever factored in the company match on a 401K? I put 4% of my income into my 401K and I get an immediate 100% return on that money. How does that play into it?

It seems to me that would lead one to do enough to maximize the company return in the 401K and then invest the rest elsewhere?

Tom

2. shaferfinancial - October 8, 2008

You are exactly right. I always say take the company match, its part of your compensation, but don’t put in a penny more. One of the times you can make some practical changes is when you leave a company. Roll over the 401K into an IRA at a Brokerage firm so you have more choices!
Unfortunately, Wall Street and the Government has put people into a catch 22 situation with 401K’s. Employees need to mitigate the damage as best they can!


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