Monthly Archives: January 2015

Can You Make Money in the Financial Markets?: My Experience with Mutual Funds

In a prior post I discussed how my financial education began with TWPMM and learning more about the commodity futures market.  After I finished with the Ken Roberts TWMPMM & course and decided that commodities trading wasn’t for me.  I continued to study about the financial markets on and off between 1998-2002.  However, most of my reading was in basic personal finance (for example books by Dave Ramsey and Suze Orman, etc.) and introductory investment type books. During that time period I was also very pre-occupied with my career, personal relationship troubles and continuing my college education. In this blog post, I will talk about how my lack of knowledge about mutual funds messed up my investment portfolio and cost me some money.

What are mutual funds?  In a nutshell, they are basically what I call “packaged’ or pooled investments of stocks, bonds or other investment products.  Instead of a fund pooling money together to buy one individual stock or bond, it buys  several different stocks or bonds together under one fund.

Mutual funds are financial investment products which are monitored and researched by fund managers.  The over arching ideal behind mutual funds is that they allow investors to diversify and spread risk over a variety of investments rather than concentrating risk on a single investment.  They are usually touted by brokers and banks as a safer form of investment than buying individual common stocks or other equities (which is not true).

The first time that I invested in a mutual fund was in 1995 after I got my first “good” paying job with decent benefits.  I enrolled in a Dean Witter 401K plan through my employer.  A financial planner came to the company and held a short seminar on our investment options through a 401K plan and  gave a brief overview of what the plan was about.  I was really young and had no prior knowledge of the financial markets at this time.

The only reason why I even considered using the 401K plan is because my employer matched our contributions and because the company president attended the meeting and advised us that saving for retirement is a wise choice.  The financial planner even presented us with pie-charts and statistical break-downs of which investments would offer the most growth over time and the investments that were considered aggressive vs. conservative.  Since all of this was like gibberish to me, I just went along with the investment suggestions of the financial planner.  Our options were fairly limited to mainly stock and bond mutual funds.

The financial planner who spoke to us appeared to be a nice gentleman, wearing a nice three piece suit.  He came across as very knowledgeable and cordial.  His papers and leather brief case made him look official and professional.  Being naïve at that time, I just trusted that he was telling us what was right. In retrospect, he was there to do a job and make sales for Dean Witter.

A word of caution that I can offer to anyone reading this is that you should never take advice from a financial adviser or money manager who doesn’t have a fiduciary duty towards you.   If the advisor doesn’t have a legal duty to act in your best interests, then you should take everything that he or she says with a grain of salt.  Seriously.

Most advisors employed by brokers and banks are most likely acting in behalf of their employers.  They may also be paid on commission and rewarded based on churning and selling more financial products and services.  They will make money regardless of whether you do as an investor.  It doesn’t even matter if they give the clients lousy advice.  Sadly, there are advisors who actually sell financial products that they know are horrible.

Everything was okay for about 4 1/2- 5 years. My portfolio didn’t lose or make a substantial amount during this time frame.  I ended up getting a better job with another company and rolled that Dean Witter 401k over into a Fidelity 401k plan that I enrolled in through the new employer.  I pretty much stuck to the same tactics for choosing mutual funds, which was to listen to the advice of others, instead doing my own research.  Huge mistake.

Then, came the bubble of 2000 and the recession after the attacks on the world trade center on Sept. 11, 2001.  That’s when things took a turn for the worst in my investment portfolio.

I can tell you first hand that mutual funds really aren’t “all that”.  Yes, there are a relative few people who are skilled at picking some consistently well performing mutual funds.  At the same time, most investors fail at picking mutual funds that perform well over the long-term.  I learned this the hard way after I had invested most of my 401k in mutual funds from 1995- 2002.

I lost thousands of dollars in my 401k after the value of the shares in the mutual funds in my portfolio plummeted.  The major mistake that I made was that I had no clue what I was getting myself into and I didn’t do my own research. They give you this frickin prospectus, containing convoluted legalese and finance lingo that a tax attorney can’t even decipher.

I attempted to read a prospectus once, and developed a migraine headache. That’s the document where the fund company supposedly discloses the fees associated with the fund and the past performance of the fund (another crock of shit).  “That past performance” is virtually meaningless, because it’s not an indicator of how that mutual fund will perform in the future.  It is certainly no guarantee that the fund will continue to earn money at all.

I didn’t understand that stuff, yet I pumped my hard earned money into it.  Cardinal sin.  I really believe that mutual funds are created for people who are either ignorant of the financial markets, too busy, too lazy to do their own research or all three.

I took advice from my co-workers on what they were investing their money in.  Since they bragged about how well they were doing with their investments, I simply jumped on the bandwagon and invested in whatever funds they said they were investing in.  I was actually purchasing funds at a premium at some point. When my portfolio started to go down in value, it was heart wrenching to receive my quarterly statements and note losses every quarter.  That went on for a good year.

A friend of mine advised me to hold onto the mutual funds until the markets rebounded.  He was much more experienced than me in the arena of equities.  He was vehement that those losses that I saw on my quarterly statements were “on paper”; They wouldn’t become real losses until I sold off those mutual funds.  It’s a concept that I didn’t fully grasp at that moment.

I couldn’t stomach the fact that I saw those negatives every quarter.  I felt like the money that I was contributing to my 401k was going to some old-fat, guy rubbing his hands together in satisfaction and smoking a cigar.  I sold off the mutual funds in my portfolio in a panic.  What I should have done was dig deeper and do some research.  That period of time, may have been a good opportunity to buy low and hold. In retrospect, my friend was correct in his assessment.

I don’t think I will ever invest in a mutual fund actively managed by a portfolio manager again.  Knowing what I know now, I would have put my money into an index fund instead of an actively managed mutual fund.  At least with these types of funds there is no management and picking and rebalancing of the portfolio.  There is no research required on the part of the investor.  And, there are also less fees compared to regular mutual funds.  Index funds basically mimic the movements of the market indices like the S&P 500, the NASDAQ or Russell 2000.

There has been study after study, which indicates that most mutual funds are poor investments.  I read an article in Forbes that says that more than 85% of mutual funds underperformed compared to the S&P 500 in 2012.  The average mutual fund investor earns an average of 2.6% annual return on their money after 10 years (I am not even certain if this is before or after the fees).  It makes little sense for the individual investor to take on so much risk for so little ROI.  Mutual fund performance tracking newsletters and services, like Morningstar are a waste of money.

I jumped in too soon with this investment product and didn’t have enough knowledge to understand the risks involved.  I ended up selling the mutual fund shares at a loss and put the money into a money market fund. It didn’t earn much money but at least I knew that my money was covered under SIPC and wouldn’t drop in value. It was after this point that I got serious about my studies of financial markets and investing.  I still made mistakes but learned valuable lessons along the way.