Supreme Court Rules for the Mutual Fund Industry

If you are not happy with the way your 401(k) plan adviser has invested your money, then, according to the recent Supreme Court ruling, you should invest somewhere else.  In a decision that is clearly a victory for the mutual fund industry and a loss for investor trying to keep fees from overtaking their investment returns, this ruling turns the responsibility of who to invest with back to the individual.


Sound like a loss for the little guy? Read more here.

Stocks Spanked; Mutual Funds Helped

It has been reviewed and reported over and over.  Folks who thought they knew what they were doing in the stock market found out how wrong they could be about not only their investments but their ability to assume risks.

These folks were and many still are, advocates for investment choices.  And many have postponed retirement, blaming not themselves and their unwavering belief that the markets would continue to rise but the markets themselves for not performing as expected.

For example, the CBS Marketwatch report suggests, without saying as much, that had you been in mutual funds and done nothing, you would be close to where you were at the end of 2007.  But if you were in stocks you sold.  And those losses will take a long time recovering.



Sticking with mutual funds that spread the risk over numerous sectors is still the best way to get where you are going.  That and consistent, increasing contributions.

Do You Invest with Responsibility?

Earlier today, on MomsMakingaMillion radio, I discussed the topic of socially responsible investing.  I have written about this topic numerous times and will continue to do so as the effort to invest where the right thing is being done continues to expand.  Once it was all about ethics and morality.  Now it is including shareholder advocacy and community involvement.

Here is a transcript of the interview I had with Kat Bellucci.


Kat Bellucci: A lot of us have become very aware about what we eat, what we buy and what kind of a footprint we leave. And then, when we invest our money, we often don’t consider that the companies we are buying in our mutual funds might be the very businesses we would avoid in the marketplace.
Well ladies, its time to take a look at taking your investments down a path that suits your concerns about the world around and the world your children will inherit?


Paul Petillo: Most investors are narrowly focused.  They want to make money.  But some investors want to make money without destroying the environment, without violating their personal values and possibly even helping others in the process.


While these types of investments have been around for decades, the cost of doing this sort of investment was not always cheap.  The sorts of investments first came across my radar when my daughter, a free spirit who was interested in investing asked me: “are there any mutual funds that are ethical?”


What she was really asking was whether the companies that the mutual funds invested in were screened for more than just performance.  While we would like to believe that all mutual funds are ethical; what about the companies they invest in?


Kat: So what describes ethical?


Read the full interview here at Target2025.com

Look for Actively Managed Funds to Achieve Retirement Success

We have eliminated risk in many of our 401(k) portfolios.  We have taken a flight to safety away from the very investments that could have propelled us, at least in the early years of our participation in our defined contribution plans, to the successes we should have had.  We turned our backs on the actively managed mutual fund and in doing so, put our retirement plan at risk.

A great number of investors reacted in a very predictable fashion as the Great Recession took hold.  They sold their holdings on the way down, in large part because no one could predict how far down would actually be and stopped contributing to their 401(k) plans.  Employers, as we have discussed here, suspended their matching contributions for several reasons (no need to spend money where it didn't need to be spent and there was no longer any reason to offer this as an incentive to keep or hire new employees).

Adding to the mad dash to protect dwindling balances, target date funds and bond funds swelled with new contributions. This was, in many instances, akin to stuffing money under the mattress.  Not that some these funds did poorly or had mediocre performance, although many did, investors felt protected or at least safe from the chaos and volatility of the open markets.  It was a flight to risk-free, or at least, invest-and-forget investments.

Once-Bitten

Historically, the bad news of a falling stock market lasts about six months.  This quick, fall-off-a-cliff drop to the bottom is often followed by a market where investors find innumerable bargains. Over the last decade, unlike all of the previous data on the equities market, recent recoveries, this one included have come at record speed.  Five years in-between market drops and recoveries is not the norm.  But possibly, could be.

This may have something to do with a much larger segment of the investment market coming from 401(k) investments. Although these plans have been around for thirty years, they have not really caught on until recently and even that trend is not fully employed by those who have access to these types of plans.  Pensions may have gone away but 401(k) plans have not fully replaced them with the working public.

That fact leaves many investors vulnerable to their emotions and to the forces that promote the marketplace.  A recent study done by Hewitt Associates found that the vast majority, or what they termed typical, investor under the age of forty had moved some or all of their retirement funds into target date funds.  Those over the age of forty found the move to bond funds more appealing.  Both of these investments, albeit conservative in nature, were forgivable. They were doing what any "once bitten" investor would do.

Read more here.

Paul Petillo is the Managing Editor of Target2025.com and BlueCollarDollar.com 

Mutual Funds and Performance

On Friday mornings at 8am PST, I appear on MomsMakingaMillion radio with Gina Robison-Billups and Kat Bellucci.  We discuss topics that focus on how to make their listeners independently wealthy.  The discussion has been focused on retirement investments and lately, on the mainstay of our 401(k) plans, the mutual fund.

Kat Bellucci: Last week we talked about taxes and the mutual funds inside our 401(k) plans.  Now you want to peel another layer back on the mutual funds with a talk about performance.

Paul Petillo, Managing Editor of Target2025.com: 

I don’t know about you, but I have been watching the Olympics with great interest and one thing you have to notice about the sports being played in Canada is how they are portrayed.  Three winners emerge from amongst the competitors and we give them medals.  But those that lost were the best in some other country – just not the best on this world stage.

And if you think about it, they all have plenty of reasons why they didn’t win.  Perhaps the winners had better coaching, better training facilities, better financing, you name it, they came to compete as the best among the rest of their countrymen and women but there was always someone better.  Someone who went faster, farther, didn’t fall.  It is the same with mutual funds.

Kat: How so?

Paul: Mutual funds as we have discussed are nothing more than big teams of investors who hire a money manager to lead them to victory.  He or she is the focal point.  The one we give credit to when things do go right, the one we blame when things go wrong , the one who never seems to be on that end-of-the-quarter podium.  Often, not even close.

We want to win.  The problem is, we want what someone else has, that moment when we can say we did better than anyone.  The spirit of competition, the grass is greener on the other side sort of thinking that gets us into trouble. So the first problem we have is with comparison.

Kat: Good point.  What do up suggest we compare them to?

Paul: There are numerous ways to compare mutual funds and none of them good.  The rule of thumb seems relatively straightforward and you will hear this from just about everyone: look for long-term performance, the cost of the fund, and the tenure of the manager in charge.

Kat: And I’d be willing to bet that it is not that easy, is it?

Paul:  No Kat, it’s not.  There are basically two kinds of funds out there.  Passive funds (index funds, mutual funds that follow a published index or some other list) or actively managed funds (the fund manager buys and sells what she or he wants within the confines of the fund’s charter).  Two different types of funds employing two different techniques.

Which makes the subject of performance much more confusing when actively managed funds are compared to indexes. Passive measures are poor indicators of what an active manager holds.  This is why, so often, index investors make the claim that not only do passively managed funds offer a cost advantage but because the strategy of buy-and-hold limits volatility, they also increase returns by limiting exposure to unnecessary risk.  Your cost for less risk however can be higher than the low cost of these funds. Also consider that index funds do not hold all of the stocks in the indexes they mimic.  And actively managed funds hold even less.

Kat:  So passively managed funds like indexes cost less but on the other hand, they limit risk.  And less risk means less reward.  So how do we judge actively managed funds if comparing them to an index is not such a great idea?

Paul: For quite sometime now, the mutual fund industry has warned investors that the past is no indication of the future.  They call this disclosure.  And investors use it as one of the default guides when making the choice of which fund to buy.

Over the last decade we have had two huge bubbles and two market reactions to those events.  Had you purchased a mutual fund, any fund actively managed or indexed as a bubble reached its peak, the previous five years performance would not have included how bad it did the last time the bubble burst. If the bad year happened six years ago, a five-year performance chart would not have included it. Just by removing the bad year from the five-year returns made many funds appear much better to investors and they flocked to own them again. 

Those five years offer the investor an average return. And averages suggest some odd things.  If you line-up of one hundred people, ninety-eight of whom are six feet tall, it would not change the average even if the person on one end was ten feet tall and the one on the other end was three feet in height.

Kat: So the past really isn’t an indication of future results?

Paul: These days, to get to the top of a bull market usually takes five years.  The bottom is usually hit in six months. This is a lot different than markets just a couple of decades ago. Bottoms were reached quickly while the top of the market was often a slow slog.

Kat: So we have the performance of actively managed mutual funds as compared by using index funds possessing some flaws.  And past performance leaving us with no real picture of the future based on the past, how does one judge performance? 

Paul: Without considering fees, look at the worst day the fund ever had and wonder, what if this was the day I began withdrawing money from it?

Kat: Can we talk more about this worst day performance measure next week?