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What The Sec Really Thinks About Mutual Funds!
By: Dr. Scott Brown, Ph.D.
Let’s go into the details of why non-indexed mutual funds are such a bad deal.
When Arthur Levitt became the head of the Security Exchange Commission in 1993
he had to sell off all of his individual stocks so that people would not claim
that he was doing any dirty inside dealing. He decided to put the cash from
selling off his stock portfolio into mutual funds.
Mr. Levitt grew very angry when he tried to decipher how particular mutual funds
divvied up their cash into specific stocks. He couldn’t make heads or tells from
the fancy brochures of the mutual funds called prospectuses. He had been a major
player in the stock brokerages for over 25 years at that point and knew that if
he couldn’t understand the mutual fund’s prospectus then he knew public
investors couldn’t either; it had to be a big scam to suck money out of the
public.
In 1980 the US public invested $100 billion into the 500 mutual funds that
existed at that time. By 1993 the public put $1.6 trillion into the more than
3,800 mutual funds that existed in that year; talk about growth! By the end of
February 2003, at the bottom of the bear market there were 8,200 mutual funds
and the public had pumped in $6.3 trillion dollars. Wow! That is a lot of money.
What is important to note is that at least 40% of mutual fund money comes in
from 401(k) retirement accounts. Today these mutual funds own about 20% of all
publicly traded shares of stock. Mutual funds act like a herd of cows buying and
selling the same stocks at the same time. This increases the wild price
volatility swings in the stock market.
These funds are also sold and managed on pure hype, short term trading, and with
key information withheld from the public. All of these factors I teach finance
students and investors to avoid! The industry confuses investors by focusing on
past performance, which should not be a factor to consider. Many mutual funds
are able to cheat the public with excessive fees because investors don’t
understand how these big costs destroy their profit. Mutual funds have no
interest in educating investors because it is easier to hoodwink the ignorant!
Don’t put your trust in mutual funds unless they are fully indexed. Indexing
means that the mutual fund simply uses a computer to buy and sell stocks in the
mutual fund portfolio so as to mimic the composition of a major stock market
index like the S&P 500. This means that there is no fund manager sucking out
needless fees. A good example is the first fully indexed mutual fund called the
Vanguard 500 (VFINX) which is also now the largest of its kind.
About the Author:
Dr. Scott Brown, Ph.D., the Wallet Doctor, is a successful investor. Dr. Brown
holds a Ph.D. in finance. The Wallet Doctor is sought after for investment
advice and coaching. For more information visit Dr. Brown’s site at http://www.BonanzaBase.com
or sign up for his investment tips at http://www.WalletDoctor.com
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