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Mutual funds are one of the most popular investment vehicles on Wall Street. Mutual funds basically pool a lot of people's money and use it for increased buying power in the markets. More buying power equals more profit. Mutual funds are handled by money managers. Mutual fund managers get paid by charging a commission on the accounts they oversee. If a manager oversees 10,000 accounts and charges $10/month to manage those accounts he starts to make a pretty penny very fast.
There are several pros and cons of mutual funds. I'll try to touch on most of them in this article.
Pros:
- Less risky than other investment vehicles. Mutual funds are synonymous with "safe" investing but on Wall Street and life in general, not taking big enough risks will get you nowhere.
- Provide diversification for your portfolio. If you're just interested in parking your money in a few places, mutual funds can be a good choice and provide a bit of peace of mind.
Cons:
- Not risky enough. Like I said earlier, if you're looking for safe investments you're basically looking for a bank account. In other words, you need to risk something if you want to get something. Mutual funds promise that if you stick with them for 40 or 50 years you'll have $500K for retirement. That's not much to shoot for especially if it takes 40 years to make it. $500K in 40 years is the equivalent of working at a fast food joint for 40 years. The amount you ended up with would be about the same.
- The manager has nothing to lose. A lot of the people that manage mutual funds have no money invested in the funds. If they mess up and you lose money then you're the only one out of luck. The manager will still make his paycheck because he works on commission. His pay isn't performance based so he has no real incentive to make good decisions with your money.
- Don't short. Mutual funds don't usually go short i.e. profit from declines in market prices. That is a very limiting approach. The market doesn't always go up.
My personal opinion of mutual funds is pretty bad. They are fancy bank accounts. Mutual funds do what you could do. The Wall Street machine keeps its wheels turning by making average joes think they could never succeed on their own. You're made to think you have to hand your money to some guy in a suit and because he has a degree in finance he's more capable of buying and selling than you.
Think hard about letting other people manage your money. Ask your self three basic questions:
1. Will the person managing my money have something to lose if he ****s up?
2. Is this person doing something that I am either incapable of or unwilling to do?
3. Is there going to be a significant enough return for me to expose even a fraction of my money?
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