The Big Secret The Mutual Funds Don't Want You To
By Dr. Scott Brown, Ph.D., Thu Dec 8th

Non-indexed try to keep it secret that activelymanaged mutual very funds rarely do better stock market indexes.The higher fees of the managed funds really make it hard forthese funds to out compete indexed funds. Smart financialjournalists occasionally rat out fund managers for not educatingthe public in this regard. When this happens the mutual fundmanagers make a feeble attempt at self defense by pointing tosomething called the 5% rule.

This rule says that for a fund to market itself as diversifiedit cannot have more than 5% of 75% of the funds total assets ina single stock. In other words, a fund can have 25% of itsholdings in a single stock, but the remaining 75% must followthe 5% rule. The 5% rule was created by the Investment CompanyAct Requirement. Fund managers claim that this hampers theirperformance instead of admitting that they are in the businessjust to clip you for high fees while the mutual fundunder-performs the general market.

The truth is that the big killer is the herd mentality of activefund managers. They follow each other around buying and sellingthe same junk. They flock to the same familiar companies andoften overlook the new, obscure companies that show greatpromise. They take great comfort in knowing that, even if theirfund misses out on a great opportunity, most of the others inits group will too. They also know that they can pull their hugefees out during the whole time your retirement savings areparked in their fund. Over the years they spend a lot ofmarketing money to make you think that they actually care.

This

is certainly not the attitude I want the manager of myretirement to have! You should be asking your self why themutual funds don’t just mimic the same portfolio stockcomposition as a major index like the S&P 500 stock marketindex. Well, some have and those that are indexed out performactively managed funds at the minimum management cost. For thisreason I strongly recommend that if you can only buy mutualfunds as in the case of the 401(k) then restrict your purchasesto indexed funds like the Vanguard 500 (VFINX).

About the author:ABOUT THE AUTHOR: Dr. Scott Brown, Ph.D., the Wallet Doctor, isa successful investor. Dr. Brown holds a Ph.D. in finance. TheWallet Doctor is sought after for investment advice andcoaching. For more information visit Dr. Brown’s site atwww.BonanzaBase.com or sign up for his investment tips atwww.WalletDoctor.com