Mutual fund investing used to be the best way for someone just starting out to invest money in the stock market.  Like I mentioned in a previous article, my initial stock market investing was in mutual funds, and this was a time when the number of mutual funds in existence was pretty small compared to now.  Now, it is extremely difficult to determine what is a good fund versus what is a bad fund.  The performance of most mutual funds over recent years has been poor in comparison to years past.  In general, most of the mutual funds out there do not outperform the S&P 500.  (One might then argue that if you wish to invest in a mutual fund, an index fund may be the best way to go).  I stay away from mutual funds for a multitude of reasons.

Mutual funds charge significant fees for the overhead of running the fund.  This cuts into the bottom line profit of the fund and leads to a lower return on investment.  Mutual funds will often have a number of stocks in the portfolio which are underperforming stocks.  The fact that a fund manager who has not proven to me that he/she truly know exactly what they are doing is in control of all of the decision-making about a portfolio of stocks is not comforting to me at all.  I think it’s very difficult to feel really comfortable with any fund manager these days.  The fact that stocks may not be able to be bought or sold at the most optimum time is also very troubling.  For example, if several investors decide to withdraw funds all at the same time, a fund manager may have to sell a stock or multiple stocks at a time that may not be optimal.  In addition, if you’re investing in a mutual fund in a taxable account, you will likely have to pay tax on capital gains whether the fund makes money or not.

I think the biggest problem I have with mutual funds is the lack of control that you have as an individual investor.  I’m really big on control when it comes to managing your own money.  I really dislike that I have to deal with mutual funds as an investment vehicle in my 401(k) plan.  And it’s frustrating that there is no ability to choose from anything but their 5 to 10 unknown funds.  I’d much rather have the freedom to choose which stocks I have in my portfolio.  Fortunately, I am able to trade individual stocks in my other accounts.

The truth of the matter is that mutual funds are not what they used to be, and I recommend that you put some serious thought and research into this topic.  Perhaps this might be the only type of investing that you end up doing involving stocks.  If that’s the case, some time spent in research on this topic may help to improve your bottom line.  Until next time, here’s to your wealth.

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