Mutual Fund Investment Strategy Disadvantages

This is a simple question that millions of investors have been asking for many years.  It seems like the overall consensus is that it is not longer a good investment strategy, but the continued success of many funds seem to suggest that people are still investing in them.  Here are the top 2 reasons mutual fund investment strategies no longer work and may never have worked in the past to begin with.

Inconsistent Track Record Performance

Everyone has heard of the study that was done to see if monkeys picking stocks by throwing darts on the financial section of the Wall Street Journal could beat mutual fund money managers.  The infamous study showed that monkeys were better at picking stocks than professional fund managers.

That finding is consistent with the other studies that show that mutual funds, on the most part, don’t perform well or at the very least don’t beat the market.  Only around 20% of fund managers seem to be able to beat the market.  The only problem is that the people on the top 20% of managers changes every year.

Costly Management Fees

Even if you get a no load mutual fund, expense ratios for these investment vehicles can be very costly.  When you factor in the fact that these tend not to be any better investment than any other method, it’s not worth it.

Alternatives to Mutual Fund

Here are some alternatives to the mutual fund investing strategy.  These have direct solutions that meet the problems mentioned above.  Consider these because famous investors like Warren Buffett have recommended these strategies.

Index Funds

Index funds are mutual funds, but they are passively managed.  That means that a computer picks the stocks, not a human money manager.  The automation aspect of index funds brings the costs, expense ratios and management fees way down.

These funds essentially track a particular index, like the S&P 500 Composite of Dow Jones Industrial Average.  By doing this, the fund lets the index picks it’s stocks for them so there’s no need for human intervention.

The low costs is a big plus, but so if the performance.  The point of index funds aren’t to beat the market, which is the aim and downfall of many mutual funds.  The aim is to follow the overall market growth over time.  History has proved that the stock market does grow, albeit steadily and slowly, over time making it a safe but good investment.

There is an index fund for everything and everyone.  You can get small cap funds that track a related index like the Russell 2000 or a fund that tracks a large index like the S&P 500.

You can also get them in the form of exchange traded funds, also known as ETFs.  These are great funds to get because you can trade them on the market just like you would stock.  You only pay the commission and you can trade them during normal trading hours.

The natural gas ETF is one that I have mentioned in the past.  This particular one tracks natural gas companies.

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