Why I hate mutual Funds 5: UNSUITABILITY FOR MANY INVESTORS
5. UNSUITABILITY FOR MANY INVESTORS
Have you spoken with your mutual fund manager lately? Nobody does that. He has no understanding of your personal investment plan. He couldn’t be expected to tailor the fund to meet your needs anyway. Frankly, you’re just a number.
You need personal risk management
An investment program requires individual care that takes into account your tolerance for risk, which is related to your ability to stomach market volatility.
Basically, all individuals should have an investment portfolio that reflects the characteristics of a pyramid — a wide base of stable building blocks topped by levels that narrow with height. The greater the heights you hope to achieve financially, the wider the base of “safe” investments you’ll need to support the riskier investments you’ll want at top. This is the Investment Risk Pyramid.
The problem is, mutual funds can destabilize your pyramid. You might, for example, buy funds that are highly related.
Suppose you bought three mutual funds thinking that one was low-risk focused, the second was moderate-risk focused and the third was high-risk focused. It turns out, they’re all moderate-risk funds. Whereas you thought you had a strong base of assets, you lack that base. Instead of a pyramid, your portfolio resembles a spinning top — weighted in the middle and wobbly.
You can also lose your pyramid stability due to circumstances beyond your control. This can occur if your mutual funds shift in the asset classes they hold. If a fund manager can’t find enough high-flying stock opportunities, he may have to settle for Blue Chips. That doesn’t necessarily harm you, but it limits your growth potential. Instead of looking like a pyramid, your portfolio resembles a mound — too much foundation, not enough reaching for the stars.
Funds can ruin a plan
Mutual fund shareholders have an inherent conflict of interest. What one shareholder needs is not always what he gets. And, what he gets is determined by the collective.
Suppose, hypothetically speaking, you own a $1,000 bond with a 7% coupon. You’re five years in and interest rates go up. You know the bond is now worth less, but you decide to hold it and keep earning 7% annually. You’ll redeem it for face value at maturity. The decision is yours.
Quite the opposite is true if you have $1,000 in a bond fund. Your fellow shareholders don’t all understand that they can continue receiving 7% yields. They see that rising rates have reduced their