| This essay is to enlighten investors on what they | | | | like Jimmy Hoffa. |
| are getting into if they are relying on mutual funds | | | | Myth #2: Mutual Fund money managers are |
| as a way to provide for their financial freedom at | | | | long-term investors. |
| the time of retirement. | | | | The average fund traded 15 to 20% of the |
| Due to the complexities of following stocks and | | | | stocks in its portfolio in the 1950. Modernly, the |
| finding competent money management, unless | | | | rate of trading within the average fund has |
| you are a multi-millionaire, many Americans have | | | | exceeded 95%. For the most part, fund |
| turned to the quick fix known as a Mutual Fund. | | | | managers are short-term speculators. |
| In recent commentary, insiders have adopted the | | | | Myth # 3: Mutual Fund shareholders are long-term |
| following opinions on mutual funds. "Most investors | | | | owners. |
| in mutual funds have no idea what they are | | | | Today's rapid rate of redemption is 75% higher |
| invested in, which is the way the industry wants | | | | than the average rate throughout the 1970s. This |
| it." In addition, mutual funds are troubled because | | | | clearly violates the most fundamental principle of |
| the rewarded for the amount of money they | | | | investing success: Buy and hold for the long-term. |
| Attract, not the amount of money they earn. | | | | Myth #4: Mutual Fund costs are declining. |
| SEC Chairman Arthur levitt, Jr. warned of growing | | | | In 1950, the average stock fund charged around |
| unfairness in the relationship between individual | | | | three-quarters of a percentage point. By the |
| investors and mutual funds in January 2001. Mr. | | | | beginning of the year, 2001 that figure had more |
| Levitt made the following comment: | | | | than doubled. |
| "THERE ARE A NUMBER OF INSTANCES THAT, | | | | Myth #5: Mutual Fund returns are meeting the |
| QUITE FRANKLY, DO NOT HONOR AN | | | | reasonable expectations of investors. |
| INVESTOR'S RIGHTS. INSTANCES | | | | In the greatest of bull markets, funds of all sizes |
| WHERE...HIDDEN COSTS HURT AN INVESTORS | | | | seriously under performed the stock market. The |
| BOTTOM LINE, WHERE SPIN AND HYPE MAKSE | | | | inability of 85% of all fund managers even to |
| THE TRUE PERFORMANCE OF A MUTUAL FUND, | | | | match the performance of the market overall is |
| AND WHRE ACCOUNTING TRICKS AND | | | | the result of high fees (see above) short-term |
| SLEIGHT OF HAND DRESS UP A FUND'S | | | | investment horizons and substantial transactions |
| FINANCIAL RESULTS" | | | | and tax costs. |
| There are, in effect, FIVE separate bills that | | | | If any of this scares you, rethink your |
| mutual funds charge. The best way to determine | | | | investments. The asset allocation model where |
| if something is effective for you or not is to | | | | they show you a pie chart with so many stocks, |
| dollarize the benefit or the burden. When you | | | | so many bonds and maybe 3% cash is a failure. |
| invest in the typical mutual fund (assuming outside | | | | This was designed for institutions with 100% |
| of a qualified retirement plan), you face the | | | | investible assets, not for individuals with lifestyle |
| following costs that erode your benefit and you | | | | needs and expenses. You'll never see any real |
| probably were never aware of them, you won't | | | | estate in that pie chart, yet for most Americans, |
| find them in your prospectus and your broker isn't | | | | their home is worth more than their other |
| going to sit down and tell you about them. The | | | | investments. No one offers the idea of buying |
| five costs of mutual fund investing are: | | | | investment properties which appreciate and allow |
| 1. Tax Costs - excessive capital gains from active | | | | you to harvest dollars out of them by way of |
| trading. | | | | refinance and adjust the rents to cover your cash |
| 2. Transaction Costs - the cost of trades | | | | harvest. Once you harvest it is time to deploy |
| themselves. | | | | and like the seasons, you can do the same cycle |
| 3. Opportunity Costs - dollars taken out of | | | | over and over again increasing your wealth. |
| portfolios for a fund's safekeeping. | | | | However, having real property as an investment |
| 4. Sales Charges - both seen and hidden. | | | | does not mean you do not manage it. What do I |
| 5. Expense Ration ("management fees") - no end | | | | mean? You have to be responsible and manage |
| to increases in site. | | | | your equity that your home accrues and if you |
| READ CLOSELY: | | | | have investment properties, you have to manage |
| How do all these fund costs affect you? Well, | | | | those properties like an investment portfolio with |
| with the expense ratio which averages 1.6% per | | | | precision planning so that it does not create a |
| year, sales charges 0.5%, turnover generated | | | | negative cash flow because cash is king. In the |
| portfolio transactions costs 0.7%, and opportunity | | | | business world, businesses that fail to manage |
| costs - when funds hold cash rather than remain | | | | their cash flow properly often fail to survive. |
| fully invested in stocks - 0.3%. The average | | | | Similarly, where individuals or families fail to |
| mutual fund investor loses 3.1% of their | | | | manage their cash flows properly they end up in |
| investment returns to these costs each and | | | | the same place, bankruptcy court. |
| every year. While this might not seem like much | | | | The four-letter word that no business can live |
| on the surface, costs would consume 31% of a | | | | with out and is referred to as the lifeblood of any |
| 10% market return. Add in the 1.5% capital gains | | | | business is CASH. Accordingly, the individual |
| tax bill that the average fund investor pays each | | | | investor is better served when they think like a |
| year, and that figure shoots up to 46%, nearly | | | | business and create cash flows to deploy with |
| half of a potential 10% return. Do you feel like | | | | leverage into arbitrages. What did he just say? If |
| you're taking one or two steps back while trying | | | | these terms are foreign to you and you claim to |
| to go forward yet? | | | | be an investor you better go look them up |
| In his book "The Trouble With Mutual Funds," | | | | because they are as old as salt in the financial |
| Richard Rutner shares that "No one denies that | | | | world and are the best investment advice three |
| the average mutual fund returns 2% less per | | | | self-made billionaires on Forbes 400 ever heard. If |
| year than the stock market returns in general. | | | | you don't know how to enlist cash flow, arbitrage |
| Yet the mutual fund industry spends billions of | | | | and leverage into your investment plan then seek |
| shareholder dollars to promote its money | | | | out a firm that does before it is too late. |
| managers as experts who can manage investor's | | | | If you would like to learn more about how |
| dollars with skill. The vast majority of mutual | | | | leverage, arbitrage and creating cash flows can |
| funds (94% according to a recent five-year | | | | benefit your portfolio or rebalance it back to |
| survey by Lipper Analytical Services) have | | | | positive, give the author a call. |
| underperformed the stock market as a whole." | | | | James Burns, Esq. |
| Therefore, FIVE serious myths are conferred up | | | | Attorney at Law |
| on the public and you would be wise to educate | | | | LEGAL WEALTH CONDUIT |
| yourself on these fallacies. | | | | "The Complete Solution" |
| Myth #1: Mutual Funds are long-term investment | | | | 18662 MacArthur Blvd., |
| vehicles | | | | 2nd Floor |
| In the year 200, 451 funds simply disappeared, | | | | Irvine, CA. |