| There are some major differences in costs and | | | | when the markets are down, and selling when |
| efficiency between mutual funds and managed | | | | things are expensive, ie. when markets are up. |
| accounts that may have a meaningful effect on | | | | Unfortunately, most fund managers are forced to |
| your investment returns. | | | | do the exact opposite because of a phenomenon |
| Mutual funds are pooled funds, meaning all the | | | | knows as the Small Investor Effect. The |
| money that you and thousands of other investors | | | | theory-and proven fact-is that the typical investor |
| send to the fund company will be put into one | | | | buys funds when the markets are doing well and |
| large pool of money and the manager will manage | | | | sells when they are not. The Fear & Greed |
| this pool. If an investor wants to add new money | | | | effect in action. That would be OK to us except |
| or take out some money, it goes into and comes | | | | that this activity puts the fund manager in a bind |
| out of this pool. A managed account on the other | | | | and forces him to sell when the markets are a |
| hand is a private account, meaning that you have | | | | buy and buy when the markets are a sell, |
| your own separate account which is not | | | | effecting us all as shareholders. Separate or |
| commingled with other accounts. | | | | managed accounts were invented partly for this |
| There are three main cost components in a | | | | reason and in theory, they avoid this serious drag |
| mutual fund: | | | | on performance-as long as we trust the manager |
| 1) internal expense ratio-the incidental day-to-day | | | | to do his thing and not interfere with our own |
| expenses of the fund like the utility bills, rent, | | | | fear and greed impulses. |
| salaries, research etc., | | | | Most of the time, managed accounts are the way |
| 2) marketing, loads and 12b-1 fees that are | | | | to go if you meet the minimums required, |
| incurred in marketing the funds and | | | | typically $50,000 to $100,000. Many mutual fund |
| 3) transaction costs. These typically add up to | | | | managers also have their brand private or |
| anywhere from 1% to 3% or more annually for | | | | managed accounts. There are times however, |
| any mutual fund, even so-called "no load" funds. A | | | | when a mutual fund is the right choice. A 401k |
| great resource is John Bogle's definitive bible called | | | | plan or an IRA where you are adding fixed |
| Bogle on Mutual Funds. | | | | amounts periodically would be a good example |
| Managed funds typically can be had for 1% to 2% | | | | because you cannot do that efficiently in a |
| all-in if you can show your broker that you know | | | | managed account. |
| the ropes. Much less if your accounts go into the | | | | DISCLAIMER: I have presented information that I |
| 7 figures. With mutual funds, you are stuck with | | | | believe to be true but do not vouch for the |
| the common expense ratios no matter how | | | | accuracy of any of it. Please use this article only |
| much money you invest. | | | | as a starting point for further inquiry if you think |
| The most crucial difference to me is the | | | | there is some merit in doing so, then do your |
| efficiency factor however. If you picture yourself | | | | own due diligence and consult with your qualified |
| as the manager of a fund, you will be looking at | | | | advisors before you invest. |
| valuations and buying when things are cheap, ie. | | | | |