Make Mutual Funds Bare All!

Eliot Spitzer's courage in pursuing mutual fund abuses is inspiring. His new focus on expenses is thrilling. But we need much more than to strong-arm a few badly behaved funds. We need the market force of choices by well-informed investors. At present, the knowledge of the average investor is falling, not rising. As of 1980, only about 10% of adult Americans had ever had any direct contact with the securities markets. Now that figure is over 50%, mainly due to the replacement of traditional pension plans by individual 401k plans. As more people must make their own investment choices, the average level of investing experience declines. It's no surprise that average fund expenses have been rising, not falling.

This guy, Spitzer, scares the crap out of me. Apparently - to him - personal responsibility for the selection of securities and of those vehicles (trusts, mutual funds, etcetera) comprised of securities should rest with only informed individuals. OK. But since he knows that in a free society someone in his position cannot just forbid investors/speculators from being a purchasers - dare I say partial owners - of securities, he thinks that these people should be entitled to "cool off" periods and for having a risk free investing experience.

Spitzer is a very intelligent trial lawyer turned Attorney General who wields way too much influence into matters where he has no legal authority. Spitzer - and people of his ilk - is one of the chief reasons why you'll hear talking heads say things like, "The Enron's, WorldCom's, Imclone's, Tyco's, Adelphia's, and Putnam's of the world..." as if there were substantially more than those isolated cases. And, being a former trial lawyer, he's never seen a class action lawsuit he didn't like. To these people the saying caveat emptor means nothing.

The overwhelming conclusion is that mutual funds cannot deliver superior performance, they cannot beat the market. What they can deliver is diversified investing at low cost, much lower than small investors could obtain themselves.

Of course you can match the market with unmanaged iShares/spdrs/market ETFs which have lower expense ratios, share turnover, and capital gains distributions than most mutual funds (0.20% for QQQ [Nasdaq 100], 0.18% for DIA [Dow Industrials]). The only downside being that you need to buy them through a broker.

This is a simplistic way of looking at things and it pisses me off when I hear TV personalities who don't actually manage money for people say it. Sure, you can buy Spyders, or Q's or Diamonds, and match one market. But that may or may not be a good thing. One look at a Callan Table will tell you that matching the market is not necessarily the best way to invest. An intelligently built portfolio with periodic rebalancing is the best way to go for investors with less than $250mm to invest, and they should use low expense ratio mutual funds. And they can do all of this themselves. There are plenty of resource available online that allow them to avoid premium broker's fees.

Although they now have ETFs that track lesser known indices with a "managed" feel to them. Check symbols DVY, PWC, & PWO.

On indexing with various U.S./foriegn, stock/bond indices and periodic rebalancing: John Bogle lays out a good case for it in his book Common Sense on Mutual Funds - New Imperatives... But a new Ben Stein/Phil DeMuth theory & book has got my interest piqued during this long-term business cycle.

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