Investing All Your Money in Mutual Funds Once is a Mistake, Twice is Stupid, But Three Times….

And I’m just talking about investing since the year 2000!

Like all investments, if the public are all doing the same thing, it is not an investment. It is more like a ponzi scheme.

But since 2000 many of you have invested your nest egg in mutual funds yourself or through your employer only to see it decimated twice. Are you going for the triple?

The problem is too much money is chasing too few investments selected by the wealth managers to make their life easier and maximise their wealth, not yours.

These investments are chosen because they can be invested in easily and fees can be charged for doing this and all on a computer.

It’s easy to take your money and invested in “carefully selected” mutual funds with the promise of long term returns all the while taking a small fee, provided you don’t cash out. Just think of 40 years of small fees 😉

It’s easy if all the wealth managers are feverishly buying and selling stocks to create a paper profit  that can then be posted as REAL profit all the while taking a small transaction fee. Again just think of 40 years of transaction fees 😉

It’s never real profit until it is in your bank account – never forget that.

The problem for you is the funnel. It will lose you your nest egg every time the market decides it doesn’t want to go up any more and turns down.

In 2000 the DotCom crash supposedly only affected the tech sector. But many Baby Boomers lost 30-40% of their nest egg. Why?

It’s all about liquidity in the mutual funds. They don’t have it. That’s why they tell you to invest for the long term and to never redeem your money.

If you do and a million other people do the same, mutual funds have to liquidate their holdings or stop redemptions. That may mean selling assets that don’t have losses just to pay people out. Stopping redemptions is the last thing they will want to do.

The shear weight of numbers of people redeeming their money can cause stocks unaffected by the DotCom crash to be sold down. All it needs is more sellers than buyers no matter how good a stock might be.

So what is the funnel? It’s the way that money is got into and out of the markets. It’s easy to get it into the market most of the time. Even when the bull is raging because people want to buy because they believe the price will go higher if they don’t.

So even if the funnel slows their entry into the market they won’t complain – too much. They’ll sit in the top of the funnel and wait.

But if they want their money out quickly it is a different story. Prices fall faster on the way down. People can’t get their money out quickly because it has to get into the bottom of the funnel and come out the top. The funnel will get blocked by the mass of redemptions to be processed. You will never get the price you hoped for.

Over the 25 year life of the wealth industry there have been several market retracement’s where mutual funds have lost their clients money but managed to prevent wholesale redemptions. many clients lost more money due to other people redeeming their money and taking their losses.

As with the efficient market hypothesis any problems with mutual fund investing have been explained away. There are anomalies you see – nothing’s perfect. They say in “normal” markets you can expect the market to correct every 5-7 years. You should not panic as it will then move on to new highs and you will recover your money.

They make no mention of the fact that it might take 5-7 years to recover that money as it did from 2003 to 2008 after the 2000 DotCom crash.

Just when you thought you had recovered your nest egg, wham! You just got another one of those pesky 5-7 year market corrections. Down goes your nest egg again maybe 30-40%. Is that what you want to do?

If you want to invest in mutual funds consider NOT putting put all of your money in them. Tax benefits may be great as long as you can get your money out before the next crash where you might lose more than you save through tax exemptions. You may be better of with some of your money in safer investments elsewhere.

Try and find alternative investments for some of your money. Read this article at Uncommon Financial Wisdom called, “What I found during my search for an alternative to MUTUAL FUNDS? It’s a well written article with some good information about Mutual Funds. There will be some follow up articles so bookmark the site. As they say,

The bottom line is that mutual fund investing as a retirement vehicle is a total failure.  This has driven me to find alternative methods of building up a retirement account and reformed my ideas of personal finance.  This journey that I hope to take my readers along has transformed my thinking in many areas.  But first you have to decide to stop doing what has failed and start looking for something better!”

Otherwise you will almost certainly be doomed to repeat your losses a third time!

Are you going to try for a third. See you in 2015-2018 or there about.

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