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Tuesday, November 3, 2009

Mutual Funds-Everyones safe Choice Myths pt3

Here is the last blog regarding myths and investing. Mutual Funds are the darlings of most financial planner's advice portfolio. They tell us to buy term and invest the difference in mutual funds. They cite how the historical gains are strong that the diversification and Dollar Cost Averaging will help negate risk. If you lose money, dont worry, the money will come back by purchasing more Mutual Shares. Here are the myths:

1. Mutual Funds provide ZERO guarantees-This does not make Mutual Funds a bad option. It just makes Mutual Funds a investment. The higher the potential return, the higher probability that person will lose money. They may show PAST performance on the prospectus, this does not mean the future gains will be the same. They are sold on past performance, and no one has a crystal ball!

2. Mutual Funds pass the risk on to the Owner of the Shares-The fees are the only risk that is carried by the mutual fund.Losses and gains are all retained by the owner of the fund shares. The fund makes money mainly on the FEES that are charged regardless of the performance of the overall fund.

3.Mutual Fund managers can move money away from the principal objective of the fund-What does this mean? Let's say that the mutual fund's principal objective is to invest in the Financial Services Sector. The fund manager MUST only invest in the stocks related to the Financial Services. If that sector is losing money, that manager must continue to invest in that sector! What does this mean for the individual Mutual Fund Shareholder? It means that your money can't be moved to stop from receiving losses! This is why people who preach using Mutual Funds preach diversification.

4.Mutual Funds used inside of Qualified Plans-While the appeal of qualified plans provide you tax deffered status in regards to the gains; there is a tax problem after 59 1/2. With these plans(except Roth IRA), you are taxed at your earned income tax bracket. Earn income tax brackets are HIGHER than Capital Gains tax schedule.

The other issue is that these Funds must out gain the rate of withdrawal for retirement. How long with this accumulated money last? Can the Mutual Fund provide an annual rate of return that will allow the investor to maintain the balance throughout retirement? I hope so, but the reality is no. Here is why:

Taxes will be higher:Currently Taxes are the lowest in the decades. With all the needs for Social Security, Medicare, etc. When investors take out monies from their Qualified accounts invested with Mutual Funds, these funds better be stable enough to carry the load for the taxes.

Health Insurance Needs-Medicare does not cover ALL health care needs, so those needs will need to be addressed from the retirement funds. Can Mutual Funds inside these 401k, IRAs, etc can they sustain the Health Care needs that Medicare does not address? With Rising Prices of Health Insurance, will it will be a challenge.

Inflation: People invest in mutual funds to keep pace or surpass inflation, but what will inflation look like in the future? With all the stimulus packages and Govt spending, it is safe to assume that the value of the dollar will be lower. Will people have enough in their retirement accounts to offset inflation and Taxes?

Value of the Funds once Baby Boomers retire: The largest segment of the population is beginning to retire, and seeking to convert these funds to cash. That means that the supply will increase, thus causing the value of the shares to go down. If this is the case, how can the Financial Planners project how much money will be in the Mutual Fund accounts? The values or balances in these accounts maybe lower than projected.

People make many assumptions, and Mutual Fund investors do the same thing. Does this mean that Mutual Funds are bad? No. Mutual Funds inside of a qualified account does not provide one of the most important thing in investing: Control over the investor's hard earned cash. It is my personal opinion for the reasons selected Mutual Funds ALONE are risky investments for retirement planning. They can be a part of the overall portfolio, but they are not the end-all-be-all for retirement.


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