Still Time To Get Out Of Mutual Funds

Since I’m not a financial advisor, you can take or leave what I’m about to say. But my answer since February of last year to the questions of friends and family, “Should I get out of mutual funds?” has been a huge YES! (If they had done so, they could have kept their losses under 5%… or even made money!) Now, lots of people are thinking of getting out of mutual funds in bad times – and that’s not a bad idea. But keep in mind we are talking about stock mutual funds – funds that invest in stock indices, or other combinations of stocks. There are other options for investing in mutual funds where your money is in cash or bonds, read on for more.

Here are just some of the problem with mutual funds:

  1. You have no control over what they pick to invest in. All those 401(K)s in the S&P 500 Index Funds? Well, how many people who socked their retirement money into these every paycheck realized how heavily weighted they are toward financials? Yeah, that’s what I thought.
  2. Many of the investment options you’re presented within a 401(K) invest in the same types/sizes of companies. everyone touted the S&P 500 Index as a great way to diversify – but a huge portion of that index was in financials. As so many have found out too late. You have to drill down into each fund and see what they invest in, and you’ll find in many cases, what you’re offered is a menu with different dishes made of the same ingredients.
  3. The funds recommended to you are mainly made up of stocks. Your 401(K) advisors have acted like they are “protecting” you by not letting you invest in commodities like oil or gold, or a wider variety of bonds, or other vehicles like ETFs (on which they wouldn’t make any money). They are “helping” you when they advise bond investments or inflation-indexed funds only as you near retirement. The lie for decades now has been that you didn’t have to learn anything, just keep putting the money away, they made it “easy” for you. Now you’re learning the hard way that NO ONE knows what they are doing and that if you invest in the market you MUST be educated about it, or you stand to lose. And Lose.
  4. Mutual funds make money on fees. Unlike ETFs, which are baskets of stocks that rarely change, mutual funds can change their holdings frequently, causing fees to eat up a lot of your investment. It depends on the fund company, however, the percentage losses you’re suffering may not include the fees your principal is also paying.

I’ve been listening to the talking heads on tee vee telling people since last October, saying “Don’t get out now you will only lock in your losses.” 

Uh, they never explain what the heck that means. You only “lock in losses” if you don’t move the money to something that is earning a return. Keeping your money in a losing investment will for sure lock in losses, and even make them bigger. The whole buy-and-hold mentality, don’t sell no matter what, keep dollar cost averaging – DOES NOT WORK IN A DEPRESSION, in a market that is going down and staying down for years at a time.

Example: Your portfolio is down 40%. You move 2/3 of it to a cash vehicle that is paying you 3%. The stock market continues down another 10%. Which one has truly “locked in” the losses? You are technically up 13% over where you could have been! When the market starts to rise again, you move from the cash vehicle to take advantage of rising prices. Where is the “lock”? Ridiculous. Get out of stock mutual funds and into cash. It can’t hurt.

So what do you do? Bonds? Cash? And what is a “cash vehicle”?

First off, mutual funds can purchase stocks or cash or debt in the form of bonds. You have to learn what the funds are investing in before you purchase shares. If your money is in a retirement account, taking money out of one kind of mutual fund to move it to another is totally permitted within your 401(K). We’re talking about moving the money inside your 401(K) from say stock mutual funds to bond mutual funds – not taking money out of your 401(K) altogether. All you would do is change your allocation of invested funds from stock funds into something safer and less volatile. 

For example, you can usually put your money in cash by moving your 401(K) investments into a money market fund, or an inflation-indexed fund (which are usually government Treasury notes or bonds); usually you’ll have some option to invest in cash. You may also have some bond funds to choose from, corporate bonds or government bonds.

As for bonds, however, even they can be troublesome, since they are only as good as the corporation backing them. For government-backed bonds, the Treasury repays those, so you would at least be in as good of shape as the Chinese.

Some Treasury bonds are inflation indexed, and funds investing in those can also be a good way to protect your money – these bonds change in value as the rate follows the inflation rate – which, I would guess in about 5 years, might not be a bad place to have some cash.

Just remember, that getting out of mutual funds in bad times does not mean you can’t invest in your retirement account. You DON’T have to take the money out of your 401(K)! In fact, if you did that, you would be hit with penalties. But you CAN move your holdings into something besides stock mutual funds. Don’t let them scare you by saying “Well you’re trying to time the market!” Your response: HELL YES I AM! You can always put your money back into stock funds when the time is right. My guess is, that would be a few years off, so why lose money today?

This lack of control over your funds is one of the reasons so many people believe that the 401(K) is not all it’s been cracked up to be. So, if you get a match from your employer, then invest an amount sufficient to get that company extra. But beyond the match amount, open a self-directed IRA, or a ROTH, or start a business and sock all the money you can into a SEP-IRA for business owners or another self-employed retirement vehicle. That way, you and you alone can decide where to put your money. 

Then start learning. You must if you want to recoup anything before you retire. The days when you could just send the investment company a check and believe it was all taken care are gone, hopefully for good. If you don’t like that, you really should get out of mutual funds – there are always CDs, or, of course, the mattress. Getting out of mutual funds in bad times leaves you with something left when the good times come back.


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