Fund Fixer

Why Most Funds Fail

Your Bottom Line

All funds will make money AND lose money. That is the natural course of events for all mutual funds. You can't control it--despite what your broker would like you to believe. But you CAN control your fees. Over the course of time, fees are the most important factor that will put you ahead. Mutual fund companies know this, but hide the information extraordinarily well. So well in fact that even your broker may not really understand the fees you are paying. We unlock the magic key. We give you the information you need to know to earn more than your neighbor who thinks he's got the answer to the top picks, but isn't paying attention to his fees.

You wouldn't hire the cheapest doctor, why buy the cheapest fund?

Unless you invest in a passively-managed index fund, when your fund wins, a neighbor loses. When a neighbor wins, you lose. The fund company always makes money. Have you ever noticed that no established mutual fund company has EVER gone out of business?

Fund managers do not deliver benefits for all. Their closest equivalents are poker players.  They compete for a larger share of the market at the expense of someone else.  True, when the market rises they can benefit, but so does everyone else. 

Most people who sell funds gloss over zero-sum math.  Some go so far as to try to convince you that money managers "make" money.  They compare their skill to that of a good doctor or lawyer.  It is a faulty comparison.

Let's compare a fund manager to a doctor. If you broke your arm you'd try to hire an expensive orthopedic doctor who heals 80 out of 100 broken arms, rather than a cheaper one who heals 8 out of 100. But you wouldn't be surprised if, a year later, a technical advance allowed ALL doctors, even cheap ones, to heal 100 out of 100 bones. It's a mathematical certainty that no fund manager will make everyone rich.

Medical science creates improvements for all. When a doctor fixes your arm someone else doesn't end up with a broken arm, as is what happens in the stock market.

A fund manager chooses from a securities pie in which every investor shares. Some securities do well, others poorly. Fund managers cannot create improvements for all. They can only get you a slice of pie that hopefully widens at the expense of another.  It's a zero-sum game.  The fund winners minus the fund loser equals zero (actually less if you count fund fees).

If fund managers were doctors, everytime one patient got well another would die.

Why isn't this apparent to all? Time and Variation. It takes decades for the effect of fees to come through the variation of performance. Fund companies are always pushing the funds that happen to be doing well at the time. It distorts the public's perception. When these funds stumble they're merged into other funds. By the time most investors realize they would have saved more in a low-fee fund it's too late. They've already been shuffled around a few funds and have transferred much of their wealth to the fund management company. It's perfectly legal. No one promised you riches.

I don't care about anyone else, as long as my manager makes me money.

If you gathered everyone into a room who said 'I don't care about anyone else, my fund will win' you would discover, as hundreds of PhDs studying the problem before you, that as a group, you will not earn higher returns.

Therefore, what you're really saying is 'I don't care about the other smart people who don't care about fees as long as they make money', I'm even smarter.  Maybe you are.

My manager has a 15-year track records that proves his worth.

Then why doesn't he put his money where his mouth is? Why don't managers promise to deliver a certain return or they don't get paid? They don't for the same reason casinos don't promise that everyone will win. Everyone doesn't.  No manager is foolish enough to promise the impossible.  They're in business to make money, and an uneducated or lazy investor is their best customer.

I don't believe my manager is a genius, but I don't believe in throwing darts either.

This is a good reason.

If every fund were put into a giant no-fee index fund, every company would look to go public. Once they were public they could rely on the index funds to hold their stocks through thick and thin. Through stock selection, fund managers weed out bad companies and help good companies, because through higher stock prices, they can raise more capital.

Granted, most people who pay for active management don't do better than index funds. But they create a competitive atmosphere which is good for everyone.

Such arguments are muted by the fact that active investors buy stock individually and create enough competition in the market.

One could even argue, all the investors of high fee funds unwittingly make more money for low-cost investors.  Low-fee investors end up with higher returns because they enjoy the fruits of competitive weeding-out that they didn't have to pay for. Instead of trying to make money in the casino, they buy the casino itself. Over time the casino will do better than most winners because most winners pay too much to gamble.

Can you pick the pickerer?

Let's assume there are fund managers who can 'beat' the market. They pick the best stocks. What gives you the expertise to pick the pickerer? Without that expertise how can you possibly pick the pickerer, who picks the stocks, that beat the other pickerers?