If Mutual Funds Don’t Churn, Index Funds Don’t Earn

Mutual Funds actively buy and sell equities with your retirement money and Index funds basically buy and hold those same equities. Index Funds claim they provide better returns at lower costs and that is probably true.

But they rely on the Mutual Funds to buy and sell equities on a regular basis. In a rising market Mutual Funds churn their portfolios to make profits. Index Funds sit on the site lines and ride the trend up.

Couple that with the brokers and researcher recommendations about what to buy. Most of these brokers/researcher recommend buying stocks not selling them. So in good times this tends to push up the price as Mutual Fund Managers act on the recommendations.

In good times prices go up and the system works. Thus we have rising stock price. Everybody plays the game and everyone is happy.

As long as no one gets greedy it can go on for years giving you a trickle down profit in your retirement funds and paying mutual fund managers big bonuses.

Each time mutual funds push up the stock prices the index funds ride the trend and announce how well they have managed your money.

They forget the feverish trading and churning the mutual funds have done to increase the prices they benefit from.

In a bear market none of these strategies work. Churning gets Mutual Funds nowhere. If they cannot increase the stock prices then the index funds don’t benefit either. Churning is just like pouring your retirement money down the drain and hoping it will clog up. If it does, you get a bear market rally.

Then the drain clears and down goes your nest egg money in one fast whooshing sound and everyone announces that it wasn’t the bottom of the market after all – sorry.

Whilst the majority of your money is invested in Mutual funds the system can work again. But if more and more people switch to index funds who is going to do the churning to increase the stock prices? Luckily this will take a while to happen if at all.

I’ve always believe an investment is only a good investment if few people know about it. If everyone and his dog are investing in the same things in the same way, then the only way to appear to make money is to artificially push up the value of the asset.

The virtual wealth created this way in Mutual and Index Equity Funds over the last 5 years as all but evaporated. However there will almost certainly be another run up of the stock market in the future just because the wealth managers only have the two models with which to create their income.

The Mutual Funds will lose more of your money churning to find the bottom of the market and the index funds will sit there waiting for them to find it. However at some point the markets will turn around and go up.

When they do it is a chance for to get your money back. So don’t blow it. When it happens ride the trend up but have an exit strategy to take you out when the trend reverses once again. Do this in whatever funds you are in, mutual funds or index funds.

Ignore what your wealth managers tell you about not being in cash because you will run out of money in retirement. They talk like you will be in cash for ever. That is not the case. You will be in cash until you can go back into the market.

They will tell you it is foolish to be in cash, but if you avoid losing 20-40% of your nest egg what is the problem with only making 2% on your nest egg whilst the bear market is raging?

It is likely to be a fast rising trend because of the shear weight of money sitting in cash accounts right now and piling up fast. The Mutual Fund Managers are itching to churn to find the up trend too, so they can get their huge bonuses once again.

Much of that money is handed over to the wealth managers by government decree so investors don’t have much say in what happens to it. This is ideal for you as it will fuel the next bull market.

This down market could work out to your advantage if you make sure you are in control of your retirement funds and have a clear strategy to avoid large losses when the bull returns.

Leave a Reply

CommentLuv badge