Death to Mutual Funds?
March 5, 2009
Bethany McLean's new piece in Vanity Fair suggests that the era of hedge fund dominance could be over. Perhaps a major financial crisis was all we needed to convince rich people that incredibly overpriced managed funds that relied on leveraged, illiquid and otherwise high-risk assets just isn't worth it. The less pressing question right now seems to be what might happen to the hedge fund's ugly stepbrother, the mutual fund.
It's well known in investing circles that most mutual funds fail to outperform broad stock market indexes and low-cost index and exchange traded funds. Nevertheless, when times are good, it's easy to justify investing in mutual funds. As long as you're making money, it's acceptable if you don't necessarily outperform comparison indexes. But when times are bad, people start to wonder what exactly they're paying for. Why should some so-called "expert" get a cut of their hard earned money just so they can flush more of it down the toilet. Index and exchange traded funds existed after the dot-com bust earlier in the decade, but this is really the first time that these products are widely available to the investing public. It seems entirely possible that those who have lost a lot of money in the past few years could make the switch out of mutual funds. If not for practical financial reasons, then to punish the mutual fund managers and advisers who don't seem to deserve the business anymore.
It's well known in investing circles that most mutual funds fail to outperform broad stock market indexes and low-cost index and exchange traded funds. Nevertheless, when times are good, it's easy to justify investing in mutual funds. As long as you're making money, it's acceptable if you don't necessarily outperform comparison indexes. But when times are bad, people start to wonder what exactly they're paying for. Why should some so-called "expert" get a cut of their hard earned money just so they can flush more of it down the toilet. Index and exchange traded funds existed after the dot-com bust earlier in the decade, but this is really the first time that these products are widely available to the investing public. It seems entirely possible that those who have lost a lot of money in the past few years could make the switch out of mutual funds. If not for practical financial reasons, then to punish the mutual fund managers and advisers who don't seem to deserve the business anymore.
