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Where the mutual fund strategy went wrong! April 1, 2009

Posted by shaferfinancial in Finance.
Tags: , , ,

The latest Dalbar Inc. mutual fund study is out and it is not pretty.  Real losses with a 5-10-15 year look back from the end of 2008 and marginal gains [below the inflation rate] for the 20 year look back.  For those who aren’t familiar with these studies the study looks at actual data from the real investors and their actual rates of returns.  No theory here, just facts.  Before anyone tries to point out that these data points are in the bottom of a severe bear market, remember the highest 20 year rate of return since doing the studies has been less than 5%.  There are  a whole host of other financial products that have done as well or even better without the stock market risk.

Here is the real reasons the returns have been so bad for mutual funds;

1. The efficient market thesis which suggests diversification and index mutual funds for the masses is severely flawed;

2. Passive investing leads to massive mistakes because it lends itself to total emotional decisions;

3.  Diversification leads to lopping off the opportunity for oversized gains but leaves the investor with market [systemic] risk;

4. Mutual funds inside 401Ks as a form of compensation leads to people having way to much of their $$$ in the market and way too little in reserves; and

5.  The army of mutual fund sales people are recruited for there sales ability not their formal finance knowledge or experience so they had no clue what the side effects of having people put most of their money into mutual funds would be.

One final comment, there are still people out there that haven’t come to terms with the failure of this strategy and still insist that holding mutual funds for the long term is a viable strategy.  Buy and hold is not dead, just buy and hold mutual funds.  Given the last 20 years of returns in mutual funds anyone who is planning on retiring over the next 15 years better not be expecting to do it on the back of their mutual fund investing!



1. Lee Smith - July 22, 2009

One of the reasons the stock market has not done well in the past 10 years is because we had two bear markets.

1. 2000 to 2002
2. 2007 to present

This has been a bad decade. There has not been a decade like this since the Great Depression Era.

shaferfinancial - July 22, 2009

Actually, there has been. But the greater point is that bear markets every few years are the norm. Here is a list since I have been alive:
1961-62 [-25%]
1966 [-23%]
1968-70 [-32%]
1973-74 [-45%]
1981-82 [-22%]
2000-2002 [-35%]
2007-2009 [-47%]

Chart available here
You can see from this that the real anomaly is the 18 year bull market [1982-2000] that mutual fund buy-and-hold strategies became entrenched into the financial propaganda being pushed by Wall Street.

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