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Mutual funds are hazardous to your wealth
MarketWatch ^ | Feb. 15, 2009 | Doug Fabian

Posted on 02/16/2009 7:17:04 AM PST by george76

Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to recover from. Certainly Wall Street titans, reckless lenders and irresponsible home buyers all deserve their share of the blame.

But one part of the financial world has not received much scrutiny for its role in the evaporation of investor wealth, and that is the mutual fund industry.

Sadly, a gullible public has bought into the idea that steady investments in mutual funds, regardless of market conditions, is the way to make their financial dreams come true.

This is one of the biggest fallacies of investing, and why mutual funds are hazardous to your wealth.

To give you a sense of just how flawed the buy-and-hold philosophy advocated by the mutual fund industry was in 2008, just look at the numbers. According to the mutual fund industry's own Investment Company Institute, investors lost almost $3.7 trillion in mutual funds in 2008.

Yet how often do you read about mutual funds leading the public down a losing path? How often do you hear about a fund manager whose performance was drastically lower than the benchmark?

My problems with mutual funds don't stop merely at poor performance or inept fund managers. There are serious problems with mutual funds that have more to do with the design and structure of these investment vehicles.

Advocating buy-and-hold investing is the backbone thesis of most mutual funds. A fund company will never tell you to move to cash when things get tough because it's just not in their best interest. Because most mutual funds must stay fully invested all the time, their concern for managing risk is secondary to their concern for keeping you fully invested.

(Excerpt) Read more at marketwatch.com ...


TOPICS: Business/Economy; Editorial; Extended News; News/Current Events
KEYWORDS: financialworld; funds; mutualfunds
Navigation: use the links below to view more comments.
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1 posted on 02/16/2009 7:17:04 AM PST by george76
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To: Grampa Dave; BIGLOOK; SunkenCiv

Mutual fund companies have one primary objective: to make a profit. Unfortunately, this profit is not for you, but for them.


2 posted on 02/16/2009 7:18:12 AM PST by george76 (Ward Churchill : Fake Indian, Fake Scholarship, and Fake Art)
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To: rabscuttle385

All invested, all the time


3 posted on 02/16/2009 7:20:47 AM PST by george76 (Ward Churchill : Fake Indian, Fake Scholarship, and Fake Art)
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To: george76
Mutual fund companies have one primary objective: to make a profit. Unfortunately, this profit is not for you, but for them.

For year I've seached in vain for a mutual company that consistantly lost money. I wanted to invest there, but sadly, as soon as I found a loser they seemed to just go out of business.

4 posted on 02/16/2009 7:22:43 AM PST by Balding_Eagle (If America falls, darkness will cover the face of the earth for a thousand years.)
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To: OKSooner

Sounds familiar, doesn’t it? Read it later after some additional Freeper commentary has arrived. /deja vu selfping


5 posted on 02/16/2009 7:24:33 AM PST by OKSooner ("He's quite mad, you know." - Sean Connery to Honor Blackman in "Goldfinger".)
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To: george76
"Mutual fund companies have one primary objective: to make a profit. Unfortunately, this profit is not for you, but for them."

...and? I should hope they want to make a profit. I've been with Vanguard for years. I think they're excellent. Did my 401k go down? Well obviously. Is it worse than if I had spent half my life resaerching and buying bits of stock here and there? No.

6 posted on 02/16/2009 7:24:51 AM PST by cookcounty (Lincoln saw slaves in America and freed them. Obama saw slaves in Iraq and gave them the finger..)
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To: george76

Mutual fund managers are mostly driven by fads and the latest analyst rankings. Most of this stuff is backward-looking and momentum driven.

If you look at what is out of favor, think for yourself, and read the financial statements, you can do better. Many savvy individual long-term investors lost less than the mutual funds because they avoid some of the frothier stocks.


7 posted on 02/16/2009 7:27:44 AM PST by proxy_user
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To: george76

You don’t have a lot of choices with employer funded 401A’s or employer matched 401K’s. We have money in both, but haven’t lost any, yet, because we moved funds to their only “stable fund” offering a few months before the crash. But all the other offerings seem to be mutuals, and we did have our funds diversified among the different funds, so in the past, we have gained, but rarely lost.


8 posted on 02/16/2009 7:29:49 AM PST by dawn53
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To: george76

There is an assault on the idea of steady diverse investment in the market, even though historically that is the absolute best investment anyone can make.

They are trying to destroy faith in the markets so they can take over 401K’s and the rest of the economy.

It’s so disgustingly obvious because they are preying upon people during a cyclical downturn. The facts are that people should invest in this market and that they are trying to scare you into accepting maybe 3% from the government or even losing money as in socioal security, in return for giving up the much larger gains to be had in teh market over time.

It’s rather obvious that if the market is to ever recover, investors will make a huge profit with whatever they invest during the downturn.


9 posted on 02/16/2009 7:30:57 AM PST by Williams (It's The Policies, Stupid.)
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To: george76

there are new funds that move to cash when the market
is falling apart. They do it for you.


10 posted on 02/16/2009 7:37:35 AM PST by aMorePerfectUnion ("I, El Rushbo -- and I say this happily -- have hijacked Obama's honeymoon.")
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To: george76

Devise a diversified and comfortable asset allocation. Write an IPS and follow it. Rebalance periodically. Invest regularly. Stay the course.

That’s what I’m doing, anyway.


11 posted on 02/16/2009 7:37:52 AM PST by dinodino
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To: george76; SierraWasp; Liz; abb

About 5 years ago, with our Fido IRAs, we got out all but two mutual funds and went to ETF’s with sell loss limit orders if the market came down.

The ETF’s can be sold like Stock anytime when the market is open, none of this, bs of waiting until the end of the business day. All so they can be bought anytime of the day.

The buy and hold a mutual fund forever has to be one of the biggest lies ever foisted on Americans, right in with Republicans are racists/liberals aren’t, Liberals aren’t fascists, and top investment officers/bankers are Republicans.

Besides not being able to buy and sell a mutual fund like a share of stock there are the following problems:

1. Many fund managers and some companies are covert lefties and buy stock of lefty loser companies like the Ny Slimes, Chicago Tribune, Compost, CBS, Fannie and Ginnie. They use the hard earned money of their share holders to keep the lefty loser companies afloat.

2. So many of the mutual fund companiers apparently force their reasonably good fund managers to buy large amounts of share of their loser mutual funds. Many of the so called target retirement year funds are nothing but losers with some S&P 500 or Dow investments.

3. Then so many funds charge a fee to buy their shares, high expense fees and other bs fees that cut into any possible profit. Then you can’t sell these funds for specific time periods after your buy them without penalties. ETF funds have none of these problems. Their expenses are out in the open and much lower than mutual funds.

We have our two IRA’s with Fidelity with No/Zero Fidelity funds with exception of their core money funds. We own CDs and corporate notes that Fido arranges for us to buy at no cost. Our ETF’s are GLD, SLV, SHY, THO, TLH.


12 posted on 02/16/2009 7:39:07 AM PST by Grampa Dave (Does Zer0 have any friends, who are not criminals, foriegn/domestic terrorists, or tax evaders?)
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To: george76

I have a Mutual Fund that lost about 40% in the last year.

I ended up with just $32,000.

I started the fund in 1984 with $5,000 and never added to or subtracted from it.

Down 40%, but still up 6X. It’s an index fund.

Buy and hold works for me!


13 posted on 02/16/2009 7:41:13 AM PST by Uncle Miltie (A trillion here, a trillion there, and pretty soon you’re talking about Zimbabwe money.)
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To: george76

For later reading.


14 posted on 02/16/2009 7:46:06 AM PST by revtown
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To: Grampa Dave

ETF’s are my number one choice for investing.
I gave up an mutual funds due to the lack of transparency, 100% stock all the time and lake of liquidity(no daily market).
There is only one thing worse than a Mutual fund..and that is one you pay and up front fee to get into.


15 posted on 02/16/2009 7:48:31 AM PST by Oldexpat (Drill Here, Drill There..we must drill everywhere.)
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To: george76
A fund company will never tell you to move to cash when things get tough...

Of course not. An entity unto itself wants YOU in the game. Your exposure (IN or OUT) should be determined by YOU. If your 401k does not offer a vehicle to park your money "safely" when and if you want, then you may be roadkill in the stampede out of Dodge.

In rare occasions it's smart to take the penalties, rather than get pounded into oblivion.

16 posted on 02/16/2009 7:49:09 AM PST by PGalt
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To: george76

Mutual funds are no different than any other investment. You invest your money and assume the risk. The people that manage the funds get paid for their work (horror of horrors!!!).

The people screaming about 401K losses apparently were sheltered from any sort of harm for their entire lives, and think life is cotton candy and pink unicorns. What a bunch of entitled pansies.


17 posted on 02/16/2009 7:50:49 AM PST by Hazwaste (Liberals love the average American the same way that foxes love the average chicken.)
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To: aMorePerfectUnion

I’d like to find a fund that sells when the market is giddy with optimism and buys when folks are jumping out of windows. Selling when the market is falling apart is a great way to lock in losses, in my opinion.

I think that within the next six to twelve months there are going to be some real bargains to be had.

The time to sell was about two years ago.


18 posted on 02/16/2009 8:04:32 AM PST by GadareneDemoniac
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To: Oldexpat

I’m 70 and my bride will be 69 in a few months.

We are a little too old to ride out recessions, so a very large percent of our IRA’s is in CD’s and a couple of Corporate Notes.

When we are in a boom, people fail to recognize what you point out and I have about their mutual funds.

Even in down times like now, they fail to really look at how their mutual funds have done.

We just got a 2008 summary of Fido Mutual funds, with the exception of a few bond funds, they all had heavy losses last year.

My wife’s 401 K was/is with John Hancock and their choices had terrible results. We got her out of those funds in July/Aug 2007 and rolled them into their money fund. That fund charges a very high expense rate and had minimal return. We rolled about 98% of that K into her Fido IRA this Novemberf and invested it in CDs and the ETF’s I mentioned in my earlier reply.


19 posted on 02/16/2009 8:11:51 AM PST by Grampa Dave (Does Zer0 have any friends, who are not criminals, foriegn/domestic terrorists, or tax evaders?)
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To: GadareneDemoniac
The time to sell was July 2007 (not quite a two years ago).

The time to buy is coming ~ but it's not here yet. Odds are good you have your money tied up insome vehicle that your suddenly insolvent and bankrupt brokerage is not going to be able to get their hands on to do the investment for you.

20 posted on 02/16/2009 8:14:24 AM PST by muawiyah
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To: george76

November 2007 up 45% YTD vs Feb 09 @ 50% of November 2007

We had a government created housing bubble. It’s not capitalism when the government spending is 40 % of GDP and they’re busily inflating a huge bubble with artificially low interest rates and encouraging liar loans.

Remember - 45% increases are not normal. Would that I had listened to myself and others and went to cash December 07.


21 posted on 02/16/2009 8:20:46 AM PST by listenhillary (Rahm Emmanuel slip - A crisis is a terrible thing to waste.)
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To: Grampa Dave

Cd’s are good for us older folks.

This may not hit bottom for a while.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html


22 posted on 02/16/2009 8:22:56 AM PST by george76 (Ward Churchill : Fake Indian, Fake Scholarship, and Fake Art)
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To: GadareneDemoniac

Ga,

That depends entirely on what you have been doing during
the two years since the top. There have been plenty of money
making opportunities since the top. They have been short lived. Most funds are fully invested all the time. Long/Short Equity funds are not. Others are not.

best,
ampu


23 posted on 02/16/2009 8:42:54 AM PST by aMorePerfectUnion ("I, El Rushbo -- and I say this happily -- have hijacked Obama's honeymoon.")
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To: Grampa Dave

www.usretirementrevolution.com


24 posted on 02/16/2009 8:44:29 AM PST by nufsed
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To: Uncle Miltie
Reason number 6 to not have a 401k or IRA for you stock market, mutual fund lovers.:

Lets' say you put 500 a month into an IRA or 401k for 35 years and gain 7.5%. You deferred 70,000. You would have 1 million when you retire. However, you will pay about 350,000 in taxes during a ten year roll out. And you will have about 34,000 a year in income after taxes through retirement.

If you put the money into an indexed-universal life program, you will pay the 70,000 in taxes over your work years and no taxes during retirement. Retirement income: 75,000 per year.

Who's retirement are you planning yours or Uncle Sam's?

25 posted on 02/16/2009 8:48:01 AM PST by nufsed
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To: nufsed

Try that with Roth IRAs and tell me how it compares; I would seriously like to know. No load mutual funds don’t charge sales commissions but insurance companies do.


26 posted on 02/16/2009 8:54:34 AM PST by csmusaret (You can't spell Democrat without R-A-T.)
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To: csmusaret
Rth IRA is preferable to the IRA. Pay the tax on the seed instead of the harvest.

You have sevral issues with the Roth compared to the IUL policy.

You can draw out the surrender value at any time with an IUl No tax penalty or repayment reqirement.

The IUL has no age restrictions.

The IUL has no contribution limits. If you have a good year or some assets you want to put in, no worry about annual limits. You can contribue monthly or annually or lump sum.

You can use your IUL as a bank to avoid non-preferred debt.

The IUL comes with a death penalty.

If you have serious medical problems you can insure someone else and still own the policy.

Old Mutual has 1.59 in assest to policy debt ratio.

27 posted on 02/16/2009 9:01:19 AM PST by nufsed
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To: nufsed

........and it comes with a free spell check.


28 posted on 02/16/2009 9:02:19 AM PST by nufsed
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To: csmusaret

The IUL commission runs 1% over time. The cap rate is 8.27% just lowered from 9.6%. Outran the S&P Index the last 25 years. 1% minimum means no loss in principle for your retirement money. Stable.


29 posted on 02/16/2009 9:03:55 AM PST by nufsed
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To: nufsed
"indexed-universal life program"

With AIG? I think not.

30 posted on 02/16/2009 9:10:03 AM PST by Uncle Miltie (A trillion here, a trillion there, and pretty soon you’re talking about Zimbabwe money.)
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To: Williams
They are trying to destroy faith in the markets so they can take over 401K’s and the rest of the economy

Sadly they have already done so for me. With all the regulations and pc correctness, companies are no longer managing nor can manage for a profit. Why would the govt own the company when they can control it. Though they will end up owning companies. Lack of morals in company mgt have also destroyed wanting to invest in the stock market.

We are now a socialist country, I don't think the stock market is a good place to store wealth. But it may be the only option for many.

31 posted on 02/16/2009 9:11:58 AM PST by PeterPrinciple ( Seeking the truth here folks.)
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To: nufsed

What say ye to post 30?


32 posted on 02/16/2009 9:15:49 AM PST by listenhillary (Rahm Emmanuel slip - A crisis is a terrible thing to waste.)
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To: Uncle Miltie

AIG was not in default on Life Insurance. They were insuring Mortgages. That was their problem. I think you’re reaction is typical and why so mnay people are uninformed abotu thwt to do. Have you tried a mattress? Or better, stay in the stock market.


33 posted on 02/16/2009 9:19:47 AM PST by nufsed
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To: listenhillary

My 33. What say you?


34 posted on 02/16/2009 9:20:10 AM PST by nufsed
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To: george76

bfl


35 posted on 02/16/2009 9:21:47 AM PST by fightinJAG (Good riddance, UAW.)
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To: listenhillary
Three more.

How many life insurance policies were in default under AIG when the governemnt bailed them out? None.

Old Mutual has 1.59-1 assets to policy debt ratio.

States have an insurance guarantee fund. In Cal it's 300,000. Others have 250,000.

Do you really think banks and the stock market are safer. If so, why?

36 posted on 02/16/2009 9:22:37 AM PST by nufsed
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To: nufsed

where IS that spell check?


37 posted on 02/16/2009 9:26:54 AM PST by nufsed
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To: nufsed

Where are they investing their money to return a consistent 8%?
________________________________
There is a spell check in Firefox that you can activate by going to Tools, Options, and under the Advanced Options - General tab, check the box that says “Check My Spelling as I Type”
____________________

Internet explorer http://www.iespell.com/


38 posted on 02/16/2009 9:31:29 AM PST by listenhillary (Rahm Emmanuel slip - A crisis is a terrible thing to waste.)
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To: listenhillary
Just didn't use the FR spell check.

They invest in preferred stocks and bonds, real estate and other places I don't recall. Old Mutual provides a prospectus and describes their assets etc.

They're using the index and guaranteeing 1%. So, if you're doing investment for retirement, you don't lose principle in a given year.

If you'd put 100,000 in the index in 1983, you'd have about $850,000 after tax at the end of 2007. In the Old Mutual program, you'd have $989,000.

In response to last year's downturn they reduced the cap rate to 8.27% from 9.6%

For retirement the rate if return is very good, but I prefer the safety and tax advantages.

39 posted on 02/16/2009 9:38:39 AM PST by nufsed
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To: nufsed
"I think you’re (sic) reaction is typical and why so mnay (sic) people are uninformed abotu (sic) thwt (sic) to do."

My point is that insurance bears single company risk. What happens when your insurance company goes bankrupt? Do you lose 100% of the value of your insurance? For example, what of GICs, Term Life, Whole Life, etc. Is their value insured by the Feds in some way?

I prefer explicitly known risk. I have mostly Index funds at Vanguard. I know I risk Vanguard going out of business, but their ability to steal the underlying assets is minimal to non-existent. So, I primarily have Market Risk, a known one that I can control. I can step away from Market Risk by going to CDs, Bonds, MMFs, gold and my checking account.

Insurance purveyors who suppose they are offering an investment, in my experience, are usually A) Frauds, B) Extremely Misleading, or C) Have such convoluted and long-term tax-based advantages that a really smart guy wouldn't dare enter that market without a PhD dissertation to back him up. For example, I have studied Annuities many times over the years, and while they appear to offer some limited marginal tax benefits, their restrictions, costs and opacity always put me off.

As Individual Investors go, I'm quite well studied. I believe in the Efficient Market Hypothesis for most stock investment categories. I know that portfolio allocation and cost minimization are the keys to long term success. I have been recently taught about Black Swans, and am sufficiently chastized that I will slowly take that into account in portfolio construction.

So, thank you very much, I will stay largely in the Stock Market, where my returns have and will continue to exceed (I'm quite sure) virtually any other investment class over my investment time horizon.

40 posted on 02/16/2009 9:59:45 AM PST by Uncle Miltie (A trillion here, a trillion there, and pretty soon you’re talking about Zimbabwe money.)
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To: Uncle Miltie
Insurance is backed by an insurance guarantee fund state by state. Some states go up to 300,000, so you can have more than one policy. In Cal they have a reinsurance program which allows other companies to take over policies.

Vanguard is as good as you can get in the market as far as I remember from my Bob Brinker info.

Well you just accused me and my wife and three major insurance companies of being a frauds. And our education and planning process of being too complex for you to understand. No wonder you're building your retirement on the stock market. I guess we must have some geniuses for clients.

Should I just leave before the feds knock on the door?

I used to be like you until I did my research and found something safer with a better rate of return and more liquid.

I should have read your last statement first. No use wasting time, if you don't want to know the answer to tour questions and accusations. Good luck.

41 posted on 02/16/2009 10:13:07 AM PST by nufsed
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To: PeterPrinciple

Just heard barney Frank say he wants to make sure that CEO’s do not receive bonuses when risks they take fail, so as to outlaw taking unecessary risks. Good bye free enterprise system, hello gray poor socialism.

Do Americans even care that they wiped out welfare reform without telling anyone?


42 posted on 02/16/2009 10:32:46 AM PST by Williams (It's The Policies, Stupid.)
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To: listenhillary

Was I clear? The 8% is an average with a guaranteed minimum.


43 posted on 02/16/2009 10:38:16 AM PST by nufsed
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To: nufsed
"Well you just accused me and my wife and three major insurance companies of being a frauds."

If the shoe fits....just kidding. More on this below.

"In Cal they have a reinsurance program which allows other companies to take over policies."

So I'm supposed to find that inserting the State of California into my financial transactions comforting? No thanks.

"And our education and planning process of being too complex for you to understand."

Yes. I'm a CMC Econ Cum Laude grad, and can hold my own with most MAs and some PhDs in Econ. I've read the WSJ every day for 25 years. I still have no idea what most insurance people are saying. Insurance wrapped around investments is too complex for me. Therefore, most normal people, I believe, are duped into Insurance. That's not to say that a really great Financial Advisor couldn't understand it and guide people into proper vehicles. I'm just saying that virtually all the people so invested have no idea what they've been put into. Might be smart, might be stupid, but they have no idea. While that may not constitute fraud, it is really not a very nice thing to do to people.

Folks may need to insure against certain risks. Fine. Term Life is a good example of simple insuring against risk. Homeowners insurance. Straight and clean.

Separately, investments in straight and clean low cost index Mutual Funds (or ETFs for newcomers) is the prime way to invest in stock markets. Buying CDs, MMFs, and cash in bank is a simple, straightforward way of managing short cash. Individual Bonds, or Bond Funds are a simple, straightforward way of getting bond dampening of stock risk. Owning some ounces of gold or silver gets you exposure and a hedge against inflation.

Each of these classes of things are simplest to address directly. A key problem with insurance is that it wraps so many concepts into one vehicle that you can't disentagle the pure play versus the alternate component (risk mitigation, for example). By the time you have multiple components, it is also extremely easy to bury a poor performing asset, a costly structure, or more risk than the person wants or needs.

I don't have a problem with insurance. People should insure against risk. But I don't ask my banker to manage my stock investments. I don't ask Vanguard to carry my insurance. I don't ask my Gold Broker to hold my cash. I don't ask my grocer to provide me with a haircut.

44 posted on 02/16/2009 10:39:17 AM PST by Uncle Miltie (A trillion here, a trillion there, and pretty soon you’re talking about Zimbabwe money.)
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To: george76
Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to recover from. Certainly Wall Street titans, reckless lenders and irresponsible home buyers all deserve their share of the blame.

I wonder why he left out the main culprits, the politicians, of both parties.

45 posted on 02/16/2009 10:42:17 AM PST by Moonman62 (I didn't compromise my soul to be popular. -- Jimmy Carter)
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To: george76

The man probably should find a new vocation....say sports writing or something


46 posted on 02/16/2009 10:45:46 AM PST by bert (K.E. N.P. +12 . The original point of America was not to be Europe)
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To: Moonman62
"Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to recover from"

If so, then they were improperly invested.

One should match their investments to their spending obligations. If you can't stand the risk of loss (heat), stay out of the stock market (kitchen).

47 posted on 02/16/2009 10:47:23 AM PST by Uncle Miltie (A trillion here, a trillion there, and pretty soon you’re talking about Zimbabwe money.)
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To: Uncle Miltie
No state of Cal in the transaction, except the guarantee. I guess you forego the FDIC on your retirement or bank funds because it's government. I thought you were after security.

For your education, you show a lack of knowledge of ways to build retirement on an insurance platform. You must have missed that day in school. And the day they taught ethics about accusing people you don't know.

Your accusing people of fraud in anonymity is despicable and dishonorable, especially when you obviously are not conversant with what you're talking about or the people and companies your accusing. But hey, it's the internet, so it's okay to do anything, right?

Building your retirement on the stock market is a mistake, as far as I'm concerned. I learn from history, not ignore it.

Have fun, I have a client to defraud.

48 posted on 02/16/2009 10:48:57 AM PST by nufsed
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To: nufsed
Have fun, I have a client to defraud.

You said it, not I.

Does Old mutual have a comparison chart against the stock market since the 1920's or 1930's?

I'm not anti-term life insurance, but everything I have seen leads me to believe it is a little higher than snake oil.

49 posted on 02/16/2009 10:56:17 AM PST by listenhillary (Rahm Emmanuel slip - A crisis is a terrible thing to waste.)
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To: listenhillary
I was talking to the other poster. If you take my comments to other posters and respond out of context without any consideration of sarcasm after I was accused of fraud, we will be at this all week.

Yes I have the Old Mutual info. I'm off to show some houses. I'll get back to you tonight or tomorrow.

50 posted on 02/16/2009 11:04:18 AM PST by nufsed
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