Thu 5 Jul 2007
Words of Warning For Mutual Fund Lovers
Posted by RichSlick under Money Management, Watch Out
[7] Comments
Last Friday, I asked if anyone was getting rich with mutual funds and went on to suggest alternative (and aggressive) investment strategies only to get the usual hostility toward anything that goes against mutual funds or index funds.
What really irritates me though is the continued use of “historical” performance as near proof of future success. Here is an excerpt from Lazy Man
At 8% returns (on the high side, but also less than the 9% the Vanguard S&P 500 has returned AFTER inflation over the last 30 years)
This is absolutely great but it has absolutely NO BEARING ON WHAT WILL HAPPEN TOMORROW. Every Mutual Fund includes the infamous disclaimer, “PAST PERFORMANCE IS NO INDICATOR OF FUTURE PERFORMANCE” yet this sentence is rarely included with assumptions like the one above.
Of course then someone anonymously posted this,
My wife and I work hard and save. In our early 30s we are worth about $1.5M, with investable assets of about $1M. That money is in mutual funds and is doing quite well, thank you.
Name of mutual fund? What type of return? Over what period? How much of that 1.5 million came from hard work / savings vs. mutual fund investment returns?
I have noticed though that there is a strong “consortium” of PF Bloggers hostile towards anything but index funds or some type of mutual fund. With 80 million people retiring over the next 10 to 20 years, how people are expecting those 10% historical returns is way beyond me. A retired person will DRAW funds from the market to pay for living expenses; a retired person doesn’t contribute to 401k anymore as he/she is retired. A retired person will drain pension money from corporations, drain tax revenue from government, and not pay health insurance premiums either.
Where exactly is all the money that will prop up the market supposed to come from with 80 million people on retirement? For anyone who wants to quote me the “index fund has historical 10% returns….” statement, let me counter with “the United States has NEVER had a period in its history where 80 million of its 300 million citizens (27%) were retired.”
Unfortunately, you’ll learn a harsh lesson in a few years if most of your money is tied up in the wrong mutual funds.
7 Responses to “ Words of Warning For Mutual Fund Lovers ”
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December 11th, 2008 at 10:36 pm[...] rant by a reader Luke has inspired this post and I’ll consider adding the disclaimer to the the [...]
July 5th, 2007 at 1:24 pm
I said that my wife and I have made our money through working hard and saving. We put money in mutual funds because, frankly, I can make a lot more money working than I can trying to eek a couple extra points out of the market.
You asked which mutual fund; we use target retirement funds. The specfic fund we use provides returns that mirror the overall market, has reasonable diversification, and tax-efficient rebalancing.
Will we ever be super-rich? Nope. I doubt we’ll ever be worth more than $5M in today’s dollars. On the other hand, I doubt we’ll be worth $0 either.
I believe that getting super-rich is a combination of taking on high risk and getting lucky. That means that there is a reasonable chance of getting super-poor as well. I’d rather avoid that option, so I’m going after “very comfortable” rather than “super-rich”.
Your point about there being a net draw on investments is an interesting one, but also an unproven one. It assumes that there is no foreign investment in the US stock market. It assumes that those retiring actually pull assets out. Remember, many retirees don’t have much assets in the market in the first place. They’ll live off SS and part-time work.
The larger issue is an interesting one. The fact is that *nobody* knows what investments will, in 40 years, have turned out to be the “right” one. So, for me, I’ll keep working and saving.
July 5th, 2007 at 2:49 pm
I don’t say that mutual funds are the end-all investment, but here are some important considderartions
1) Studies have shown that the market returns 10.5% on average over the last 200 years, not just 30. That is a pretty decent representation. Taking a S&P 500 index fund it a great way to get those again.
2) Real estate, on average, jsut beats inflation by 1% (and is pretty volitile as we have seen)
3) sure, past performance is no garauntee of yada yada yada. but past performance is the best indicator we have
4) Its not like all those retirees have $500k in retirement… per EBRI.com, the vast majority have a tiny ammount.. those that have a lot, have a ton and won’t hit principle that hard.
Now, I dobt we are in for 10% over the next ten years, but after that we’ll return to historic averages.
July 8th, 2007 at 10:58 am
I’ll ask again…
Your post is just a rant without a solution. I am asking you what I should do at 27-years of age if pumping my money into mutual funds is for losers? ETF covered calls? Real estate? Vintage baseball cards? European companies?
At the end of this post, you actually cover your tracks pretty well saying, “you’ll learn a harsh lesson in a few years if most of your money is tied up in the WRONG mutual funds.”
Implying that there ARE quality mutual funds out there that you will NOT have to learn this harsh lesson with.
July 8th, 2007 at 4:56 pm
I have FREQUENTLY advocated a VARIETY of investment vehicles to meet your retirement needs. My big complaint is the PF Blog world is constantly touting mutual funds as the way to get rich and that’s a totally dishonest statement. There is no guarantee. My blog is called GET RICH SLICK because I have a two pronged method of getting rich:
1. Get Rich Slow – Hard work, savings, 401k contributions, IRA contributions, etc
2. Get Rich Quick – Aggressive investment strategies (ETF Covered Calls), Currency Trading, Real Estate investments, Starting a small business.
The net result, for me, is to GET RICH SLICK.
You’re 27? How much money you earn? 50K, 100k, 150k? If you’re not earning at least 90k by the time you’re 27 then you won’t be getting rich unless you win the lottery. I would suggest you start finding a career that will pay you at least 100k.
If you’re already at 100k, stashing away the make 401k (15k/year), maxing out your roth (4k/year) and have at least 50k in savings then you can try out ETF Covered Calls, Currency Trading, or Real Estate investing.
Does that help?
July 9th, 2007 at 7:54 am
No, none of this helps. You have now stated again there is no guarantee in mutual funds….where’s the guarantee in trading currency, ETF covered calls or investments in real estate? You should be a guest on that awful ‘Millionaire Inside’ show.
I love it…You got two rules. One, at 50%, is to save money in 401K’s and IRA’s [ie. mutual funds] and the other 50% is to basically light your money on fire for 95% of the general population. I get what you are doing, but you have yet to provide anything solid. You can’t make a debate for your style starting with how mutual funds don’t guarantee anything and comeback in the very next sentence of trading freakin’ currencies…lol.
I don’t make near 100K…should I quit because at 27-years of age, my path to financial freedom is over? That’s it. I should stop trying now. Color me offended. What’s with the magical 100K salary? Once you make that much money, the world is yours?
I won’t get rich unless I hit the lotto? LOL. Re-read the garbage you just posted. That has got to be the dumbest crap I have ever read. That’s your comment to the majority of folks reading your blog? That there is NO shot in hell of becoming rich unless you don’t play by your silly rules?
Who does your blog target if not for a young, finance driven, blog reading, investment seekers like myself? You are basically telling me, in a round about way, to stop reading your blog because of the silly insults you are throwing my way and saying “this place isn’t for you”…I think I get it now, this blog clearly isn’t for me.
Explain to me how making $100K is the end all, be all at 27-years of age? What is at 27-years of age you have racked up $250K in CC debt and spend $110K a year on a 100K salary? Your assumptions based on income are telling. If I make $50K after taxes a year and can invest $30K a year, tell me why on earth I need to make 100K again? Why insult folks with generalities?
In the future, I just wouldn’t assume the things you are…it makes an……ahhhh, you know the rest.
I guess it’s time for a little bookmark housekeeping anyways.
July 9th, 2007 at 9:08 pm
Clearly, this blog isn’t for you Luke. You just don’t get it; you don’t get what it takes to get rich. Go back to your mutual funds, at best over the next 30 years, you’ll be lucky to earn 6 or 7 percent on your funds.
Yeah, you’ll occasionally hit a year or two where you’ll earn 10 or 20% on a particular fund but you won’t be getting rich.
I have specifically stated that this blog is geared toward HIGHER INCOME INDIVIDUALS that have DISPOSABLE INCOME to invest in more aggressive investment strategies.
I have done currency trading and I’ve made $2000 in 30 seconds while it may take you 50+ hours working at a zero job to earn that much.
How am I able to do it? With that 100k+ salary! Once all my basic needs are met (with about 50k) and I’ve stashed away a few dollars (401k) then the rest is aggressive investment money.
So you can return to your “invest in mutual fund” bloggers that give you a nice cozy warm feeling where you can all sit around patting yourselves on the back at how wondrous your primitive investment strategies will get your rich (yeah right).
And if I haven’t been clear enough, THIS BLOG ISN’T FOR YOU! IT IS FOR HIGH INCOME INDIVIDUALS. Once you start earning 200k a year, you’ll understand the need for this particular blog and alternative/aggressive investment strategies; for now YOU JUST DON’T GET IT!