Don’t think that I have no idea about the finance industry and mutual funds in general work. I do and I have studied it for my own sake. I will keep it simple and just say that the whole industry claims that it can do something that it cannot consistently.
I will make the bold claim that every single mutual fund can be beaten by an index fund over time, all claims to the contrary are extremely mathematically improbable, and the entire mutual fund industry should not exist at all from either an academic or a consumer standpoint.
I have no idea why the players in this profession haven’t been called on it much harder.
A mutual fund is a kind of index fund. So perhaps you can explain what you are trying to argue is a better investment than mutual funds (a stock-only index fund?)
Anyway, even your premise that mutual funds are not as high performing as other collective investments does not bear out the conclusion that mutual funds are therefore a “scam.” To be a scam the investment companies who offer mutual funds would have to all be cheating people or lying to them. My mutual funds have held steady and returned a profit (however small) even over the last six quarters. I was told they were a low performing, conservative short-term investment and they have performed exactly as they were predicted. I wasn’t lied to, my money is still there. So how was I scammed? I don’t accept as an answer that there are more aggressive investments. To tell me I was scammed you’d have to show that I was lied to or robbed.
We have been told by countless financial writers and advisors that having a diversified portfolio of investments is the safest way to invest, so let’s accept that as a given for what follows.
You could diversify by buying a basket of individual stocks, bonds and whatever else suits your fancy. You can also diversify by buying a basket of investment classes, and this can be done with mutual funds. By investment classes I mean things such as large cap stocks, international bonds, industry sectors (energy, health care, etc.). There are mutual funds that invest solely in these particular classes, so this can be a way for you to achieve a diversified porfolio without having to pick a basket of individual instruments.
Although the purpose of many funds is to beat the market (and as you say few if any consistently do so), others exist to provide investors with an easy way to diversify across classes.
They are not a scam; you just have to know how to use them to achieve your financial goals.
Disclaimer: I am an individual investor and am not employed in the financial industry.
Background for the uninitiated. While it may not be possible to “beat the market” consistently, it is possible, and frequently desirable, to adjust your exposure to risk, with a tradeoff of expected value. Doing so is not always trivial, so to the extent that mutual funds offer this service, they perform a valuable service.
But isn’t the ‘Wealthy Barber’ still being touted as a must-read in college?
The problem with it is it goes on the premise of a mutual fund paying 12% interest. But hasn’t this been unfeasible for at least the past decade or so?
I should have stated that an ACTIVELY managed fund is almost always a bad idea. Passively managed funds like indexes almost always do better in the long term. There is the issue of convenience which is probably forms the heart of the whole scam but it that can cost tens of thousands of dollars in the lifetime of the average person if not much more. Anyone with any financial sense can create their own, personal fund just based out of a cookbook if nothing else.
Yes, mutual funds are a tool for diversifying not beating the market. You should focus on reducing fees which means avoiding actively traded funds. Actively traded funds may beat the market for some time but for the most part that is a fluke which won’t be sustained. There are a very small number of fund managers who have genuinely superior insight and can beat the market consistently but it’s very hard to figure out in advance who they are. I suspect most of these are anyway working for hedge funds which are beyond the means of the average investor. Note that even among hedge funds it’s probably only a minority who can consistently beat the market.
The actively traded mutual funds survive because most investors don’t understand probability. They don’t understand that some funds will be able to generate superior returns for some time purely by chance. These funds will advertise their performance heavily and attract naive investors. Then a few years later, a mostly different bunch of funds will have performed drawing in a new set of investors. And so on. In the long run actively traded funds as a whole underperform the market but certainly the people who run them make a lot of money at the expense of investors who mostly earn sub-par returns.
I wouldn’t go so far as to call it a scam because usually there are no false promises that are being made. But the product is certainly a sham which is simply not doing what investors want it to do.
BTW this is a great [article](http://www.portfolio.com/executives/features/2007/11/19/Blaine-Lourd-Profile?page=1#page=1)by Michael Lind in Portfolio about Blaine Lourd who became rich selling actively traded funds, grew sick of the industry, and became an evangelist for passive investing.
Yes, I would like Shaggy to explain how actively managed funds are a “scam,” even if we accept the premise that they are not as good as passively managed funds (which I have nowhere near the expertise to judge). I mean, this seems something like saying the Washington Nationals are throwing games. It’s true that they lose, but it’s quite a different thing to say they are actively deceiving people and have some ulterior motive to losing.
I don’t know about actively managed funds being a “scam” (as in a means to intentionally bilk people through misrepresentation if not outright lying), but I do agree that most mutual funds don’t beat index funds, and 100% of my equity portfolio is in index funds.
I’ll call them a scam because the active mutual fund managers WILL tell you they can beat index funds and that index funds are for naive investors. Wouldn’t you want someone looking after your money for you rather than riding the 50% drop all the way down (yeah, like they did the past two years:rolleyes:) Now the prospectus will spew the BS that “past performance is no indicator…” but speak with the salesmen and see what he tells you.
There’s 0 evidence that they can beat index funds especially when taxes are included in their trades. But most people don’t want to be average. They prefer to roll the dice and be better than average and end up being worse more times than not.
In this type of volatile market, it should have been easy killing for the brilliant active fund managers who spend all their day on this stuff. Instead the dopes watching Dancing with the Stars or American Idol did better.
It is certainly not the case that I have no idea about this topic. I have a strong academic background in statistics, I am a trust fund baby, and I read financial texts for fun. I have my own financial advisors, trust attorneys, and CPA’s that I sometimes ask about this and even they can’t give me a straight answer. That is why I started the thread.
The problem with my side of the argument is that I see that there really isn’t any argument. Almost all evidence shows that actively managed funds are not a good idea for anyone yet there is still a huge industry built around them. To state otherwise runs dangerously close to the financial version of creationism and has no basis in science or reality.
I came to this conclusion a while ago. If there are any people who can consistently beat the indices, they must be impossible to identify. Consider: Every transaction must have two parties, a buyer and a seller. If the deal is better than average for one of them, then it must be worse than average for the other. But if there existed people who were genuinely better than the indices, and it were possible to tell who they were, then pretty soon everyone would just be buying the same things they buy and selling the same things they sell, and you’d end up with everyone making out above-average, which is of course impossible outside of Lake Woebegone.