Whatever You Do, Avoid Mutual Funds

This is your red-letter day, dear reader. If you hadn't happened on this article, your life might have unraveled in a most unfortunate way. You might have -- gasp! -- invested in mutual funds!

As Shakespeare might say, "Heaven forfend!"

I'm here to steer you away from dastardly mutual funds and toward more sensible investments. Such as ... well, I'll think of some soon. In the meantime, let me list the countless drawbacks of mutual funds.

Diversification
If you invest in a mutual fund, you'll instantly be invested in, say, 50 to several hundred stocks (or bonds, or what have you). Invest in a broad-market index fund -- for example, one based on the S&P 500 -- and you'll own a stake in 500 of America's biggest companies, Honeywell (NYSE: HON  ) , Nabors Industries (NYSE: NBR  ) , and Hershey (NYSE: HSY  ) . Over many decades, the S&P 500 has averaged annual gains of about 10%.

That's nice, but an average of just 10% per year? Sure, that's more than the long-term average gains of bonds, real estate, and lots of other things. But come on, you gorbellied, knotty-pated hugger-mugger -- that's playing it too safe!

If you invest all your money in just one or two stocks and hold for the long run, you might do much better than 10%. Best Buy (NYSE: BBY  ) , for example, sports an average annual return of more than 24% over the past 20 years. For Procter & Gamble (NYSE: PG  ) , it's above 15%, and for Tiffany (NYSE: TIF  ) , that average return is 12%.

Of course, not every company fares as well. Radio Shack (NYSE: RSH  ) has averaged a little more than 2% over the same period.

Professional management
Some investors favor mutual funds because they allow trained professionals, some with sound ethics and deep insight, to invest your money for you. Well, I suppose that's fine -- if you're a fobbing, clay-brained measle.

Don't you have any respect for yourself? Do you really need someone else to manage your money? I suppose you don't pull your own teeth, either, preferring to leave that to a "professional." And how hard is it, really, to rewire a house? Electrician, shmelectrician.

Low cost
OK, so mutual funds, at least the good ones, don't cost too much. Investing advisors can take 2% or more of your assets each year -- plus a share of your gains -- in exchange for their professional guidance. In comparison, some index funds charge less than 0.25%, while many well-managed mutual funds charge around 1% or less.

If you wanted to buy into 20 companies on your own, it wouldn't be cost-effective to do so without many thousands of dollars at your disposal. But with mutual funds, you can spread as little as $1,000 or less across a variety of companies.

Of course, you could put all your money in one stock. Sure, it's risky, but it won't cost you much, relatively speaking. If you plunk your entire $50,000 investment into one stock, the brokerage commission might be just $10 or $25 or $50. That's peanuts. There's your low cost, you yeasty, bat-fowling coxcomb, you.

Dollar-cost averaging
Oh, you just want to have your cake and eat it, too, don't you, you puking, ill-breeding canker-blossom? You want to be able to add to your investments regularly over time, without incurring copious commission fees? You like that you can regularly invest in a few mutual funds painlessly and inexpensively?

Fine. Suit yourself, you droning, rude-growing pignut.

My simple plan of putting it all in one stock makes dollar-cost averaging easy. If you're just plunking $25 at a time into stocks, and paying a $10 commission to do so, though, you're not doing yourself too many favors.

More "advantages"
I know. You can cite other so-called advantages of mutual funds. They make record-keeping easier, for example. They're very liquid, meaning you can cash out quickly if you need to (as opposed to, say, real estate).

There's even a wide array of funds to choose from, including many that focus on companies by size, geographic region, industry, social responsibility, growth, or income. Go ahead and dwell on these if you want, you infectious, swag-bellied vassal.

And you, too, my fellow Foolish writers, you frothy, pox-marked gudgeons. I know that many of you look kindly on mutual funds. Rich Greifner, I know you think that funds are the "Best. Investments. Ever." Tim Hanson and Brian Richards, I know you think you've found the market's 10 best funds. There's even a Fool writer who thinks you can double your money with funds!

That kind of pro-fund enthusiasm must be why we launched an investment service several years ago that's dedicated to introducing investors to some "top-notch" mutual funds. I suppose there's some sense to that, since many weedy, half-faced mammets will still opt for mutual funds, no matter how much common sense I try to beat into them. (And, OK, I concede that the newsletter is doing rather well, with its picks beating the market by double digits.)

So go ahead, you beslubbering, flap-mouthed harpies. I invite you to sign up for a free trial of our Motley Fool Champion Funds newsletter, which offers regular fund recommendations monthly in an easy-to-digest format. A free trial gives you access to all past issues, so you can read about each recommendation in detail ... you goatish, earth-vexing nut-hook.

This article was first published July 16, 2007. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of no company mentioned in this article. She tapped the services of a Shakespearean insult generator for this article. Best Buy is both an Inside Value recommendation and Stock Advisor selection, as well as a Motley Fool holding.The Motley Fool is Fools writing for Fools.


Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2008, at 11:00 PM, biwag wrote:

    You are right. Stop paying money to companies like Morningstar - mutual funds the bigest lie of the 20 century.

    Star rating - mistake. Market down -all will go down normal distributution.

    People start think for yourself - stop

    making living for fat cats in investment

    lie companies.

  • Report this Comment On October 23, 2008, at 7:59 AM, tony26098 wrote:

    What a timely article! Just got out of a Fidelity Mutual Fund (bond fund) where it took a major hit like most investments but there is a difference. First, you are a captive audience in a mutual fund as there is no intra-day exit. Second, there is VERY LIMITED info on the internal workings of the fund. Third, when you call the the mutual fund co. they give you no info on changing internals and prospectuses are months old is no "real time info". Last and the most important thing to remember (and take this with you) Mutual funds are like discount stores,as there are many items in a discount store that you would purchase and many things you would never buy. Well, ALL Mutual Funds operate on the same principle as there are many good stocks 10%you would buy and 90% of stocks and other "creative instruments" you would not touch with a ten foot pole! Get the hell out and do not look back as you can pick and make your own fund from the S&P 100 with a lot of good beaten down stocks that pay dividends and deliver good returns as the market tanks. Fidelity, you cost me money and I am not going to forget!

  • Report this Comment On October 23, 2008, at 8:08 AM, tony26098 wrote:

    This is not a market for novices, take your portfolio (all you have) to an actual professional (one you trust) for a critical review and make intelligent "rebalances" based on that persons recommendations. Remember, it is YOUR money and no person can watch it better then you but you do need guideance from a professional not some "specialist" for instance at a mutual fund company. Get yourself a independent broker before you lose the rest of your money.

  • Report this Comment On October 23, 2008, at 9:25 AM, xozo wrote:

    That is a REALLY bad article! Ask the people who put all their money in AIG whether they agree with your analysis! Until last summer, AIG was an excellent choice, but then the shareholders suddenly lost everything. Same thing for Bear shareholders. This article makes no sense whatsoever, particularly in the current climate!

  • Report this Comment On October 23, 2008, at 9:47 AM, franklinomics wrote:

    Thou droning motley-minded clotpole! I am more facinated with the insult machine. Anyway, I'm buying more GE.

  • Report this Comment On October 23, 2008, at 10:32 AM, KwizatzHaderach wrote:

    Simply astounding that the facetiousness is not picked up on. I mean, the Fool sells a mutual fund premium service. Granted, I'm sure not all the writers agree on everything, but the site is full of "index funds should make up around 90% of your holdings."

    Index funds = only way to invest for those who don't want to make investing a second full-time job.

    I mean seriously, if this article were serious, why not make that 1 stock a penny stock?

  • Report this Comment On October 23, 2008, at 11:17 AM, bwheeler58 wrote:

    I would prefer to see less sarcasm in articles.

  • Report this Comment On October 23, 2008, at 3:27 PM, shawnx wrote:

    The statement that investing in an index fund is "playing it too safe" is not sensible -- the S&P has dropped over 40% in a year. If that's too safe, perhaps the author would have been more content with, say, Leman Bros stock with a -100% return?

  • Report this Comment On December 22, 2008, at 1:58 PM, georgeisnuts wrote:

    All statemests are good for thinking and questioning: It's a good format. Now I look at every talking head on CNBC as well as every mutual fund genius that has lost 30>40% for their clients. How smart are they? My husband and I went to see a 12 year old advisor at Fidelilty and he told us how slow we were for putting everything in cash. And in the some breath told us how we could get a fantastic 6% if we acted fast on a fixed annuity. Needles to say we walked. It's hard to trust a 12 year old with your savings. ~ Or even and old man for that matter. Luckily we got out of stocks and mutual funds in April of '08. Stay the course? I don't think so.

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