Mutual Funds Suck – Episode #12

You read that right, actively managed mutual funds suck! High fees, short tenured management, success leads to failure, paradox of choice; there are many reasons why mutual funds suck and Ethan Bloch spends today’s episode explaining them.

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Drink on today’s Thirsty Thursday:

Boylan Bottleworks Black Cherry Soda

  • I just started drinking Boylan a few weeks ago! Love their Root Beer and Black Cherry. And I LOVE the fact that their is no HFCS!

  • Boylan soda rocks! I'm excited to try all the different variations they have :P

    Cheers.

    Ethan

  • I do agree. But it's not the mutual funds themselves it's the managers. If the managers handled the fund like we do our own, short oil lately, using inverse short etf's. paring loses at 8% etc. they would be fine. But they don't. They just collect the fees and go golfing. I feel sorry for the average person that is looking for someone to manage their money.

  • The average person shouldn't be looking for someone to manage their money, they should be invested in index funds. If they are looking for a financial planner they need to make sure that person isn't incentivized to sell them certain funds or products but is incentivized to make them wealthy.

    In regards to shorting oil and short etf's you have some valid points. However I'm going to have to disagree with you. Shorting oil and using inverse short etf's is a game plan that would not increase the value proposition of mututal funds. Although these strategies may prove profitable if done on your own, which in itself would require lots of time and energy on your part, it most likely they would not prove profitable to the fund owners of mutual funds because in turn a mutual fund that employed these strategies would charge higher expense ratios, more like a hedge fund.

    In fact you have described strategies used and marketed by hedge funds and as we all know, the default expense structure for a hedge fund is 2/20. Meaning they get 2% of the asset base in fees no matter if they make or loose money, and then when they do make money they keep 20% of the profits... the clincher is the that taken as a whole hedge funds underperform the S&P 500... ouch

    I can't imagine hedge funds clothed in mutual fund skin would be any different.

    Thanks for chiming in Ray. As I said at the beginning you definitely bring up some valid points.

    Cheers.

    Ethan

  • you said>>>The average person shouldn't be looking for someone to manage their money<<<

    I agree. I dislike managed mutual funds with a passion. But there's more to it than that. Index investing does work, but you are still relying on other people to make that strategy work - namely the active traders that buy and sell stock in order to make the market efficient enough for you to just sit back and take advantage of the information as it comes to the market.

    I think you would be terribly disappointed if literally EVERYONE adopted this strategy. There would be no one setting the prices and your index fund would be worthless...you would have the exact same problem that you are ascribing to actively managed funds.

    In short, index investing works as long as a *minority* of investors are using the strategy. The "myth" as it were of the EMH is that information comes to the market instantaneously (or too quickly for anyone to capitalize on it).

    The truth is that nothing happens that quickly. You wouldn't have successful traders beating the market every day on their own...and you definitely wouldn't have Peter Lynches and Warren Buffets.

    While I don't see anything wrong per se with passive investing, just don't forget who butters your bread :o)

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