Are Mutual Funds Worth It?
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Financial Planning - Financial planning in general. (Moderated) 

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Subject Author Date
Are Mutual Funds Worth It? norak 01-21-2009
Posted by norak on January 21, 2009, 8:45 am
Many say that an actively managed mutual fund is not worth it because
most do not outperform the market and hence investors are encouraged
to invest in index mutual funds.

However, is it a good idea to put your money into an index mutual fund
and pay management fees every single year? Why not buy and hold shares
through a discount broker? Buying and holding through a discount
broker may be cheaper because you only pay brokerage fees once and
there are no management fees. The stocks you buy can be purchased in
such a way that you replicate an index.

One potential problem with this idea is the lack of diversification
you may get. Mutual funds can invest in thousands or companies but
investing in thousands of companies through direct stock can be time-
consuming. However, is it necessary to hold so many companies? What
about the 15-stock diversification rule?


Posted by rick++ on January 21, 2009, 10:06 am
Most indexes I'm aware have a minimum of 20 stocks
and some have hundreds. Lot of work to do it yourself,
especially if you ever sell.


Posted by on January 21, 2009, 10:49 am

> However, is it a good idea to put your money into an index mutual fund
> and pay management fees every single year? Why not buy and hold shares
> through a discount broker? Buying and holding through a discount
> broker may be cheaper because you only pay brokerage fees once and

Advantages for an index fund:
Transaction costs
Diversification
Recordkeeping
Rebalancing
Liquidity
Ability to invest a little at a time
Effort

Some asset classes are very difficult to build a decent
diversified portfolio unless you are investing very very
large quantities of money

Disadvantages:
Management fees (though at as little as 10bp, that's not
much of a criticism)
Certain asset classes aren't well covered by decent indices
Tax management (ie. tax loss selling - also not much of
a criticism, as one may certainly sell off
some lots and as long as they are not
reinvested in the same index, no problem)

For the vast majority of investors, those advantages
outweigh the disadvantages so enormously that it's
amazing.



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Posted by PeterL on January 21, 2009, 11:15 am
> Many say that an actively managed mutual fund is not worth it because
> most do not outperform the market and hence investors are encouraged
> to invest in index mutual funds.
>
> However, is it a good idea to put your money into an index mutual fund
> and pay management fees every single year? Why not buy and hold shares
> through a discount broker? Buying and holding through a discount
> broker may be cheaper because you only pay brokerage fees once and
> there are no management fees. The stocks you buy can be purchased in
> such a way that you replicate an index.
>
> One potential problem with this idea is the lack of diversification
> you may get. Mutual funds can invest in thousands or companies but
> investing in thousands of companies through direct stock can be time-
> consuming. However, is it necessary to hold so many companies? What
> about the 15-stock diversification rule?

Most people don't have enough funds to hold a diversified portfolio,
nor do they have the time and knowledge to manage their own portfolio
of stocks.


Posted by Ron Peterson on January 21, 2009, 12:47 pm

> Most people don't have enough funds to hold a diversified portfolio,
> nor do they have the time and knowledge to manage their own portfolio
> of stocks.

Where can people go to find out which funds and stocks to own? The
problem with financial experts is that there are so many of them and
past performance isn't a good sign of future performance.

I don't see why people shouldn't take the time to get some knowledge
about economics and investing especially when they will end up having
several years of income tied up in investments. 25% of the US
population has at least a 4 year college degree and they should be
able to acquire financial knowledge.

--
Ron


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