Fact becomes History. History becomes Legend. Legend becomes Myth.
Are mutual funds as cute, cuddly and safe as teddy bears? Do they offer a higher return than anything else out there? Or are they as shady as a three dollar bill?
Thanks in part to the fabrications and confusion created by the very people who work within the industry, separating truth from fiction in the financial industry is not always as easy as it should be.
Understanding Mutual funds is no exception. But we’re here to change all that. Here’s a list of myths that we’ve busted for you!
Myth #1: Mutual Funds definitely will give me the returns I seek.
There is absolutely nothing guaranteed in a mutual fund. It is – at the end of the day – a portfolio of stocks and other investments, and fluctuates like your own portfolio would. Just because a mutual fund returned 8 percent last year doesn’t mean it will do the same this year. There are no sure things in investing.
Myth #2: Mutual Funds don’t cost me a dime to invest in.
Regardless of how the mutual fund is structured, there will always be a fee of some kind. Either it’s explicit, such as a charge up front when you invest – or it’s implicit, such as part of the profit made goes to the fund (If the fund makes 8 percent, you get 7 percent – 1 percent is kept by the Fund Manager). It could also be a redemption fee. This is a fee you are charged when you withdraw your money. Mutual funds are a business, and they need to make their money somehow.
Myth #3: A price drop is not necessarily a bad thing
While you might see red (in more ways than one) when your mutual fund drops in price, consider looking at it as an opportunity to buy more at the lower price. This is also called “dollar-cost averaging” in the finance world. It’s like stocking up on toilet paper that is at 50% off, even though you have 10 packs sitting in your closet.
Myth #4: A mutual fund returns more money than the market
A very common mistake that investors make is to assume that mutual funds perform better than the (stock) market. While it’s every mutual fund’s dream to beat the market, historically only 20 percent of mutual funds have actually accomplished this. Additionally, mutual funds average 2% percent less per year than the market. In other words, you may be better off investing in the S&P 500 than mutual funds.
Myth #5: Mutual Funds don’t need to be checked regularly – that’s what the fund manager does anyway, right?
Do you check on your bank account from time to time? Even if your money is in the savings account? Well, why wouldn’t you check on your mutual funds then? Especially since you know that there is no such thing as guaranteed performance. Checking on a mutual fund is like checking on your own stock portfolio. You have to be persistent, careful, and know when to cut your losses.
Myth #6: You can find a mutual fund perfect for your financial goals.
Mutual Funds have some sort of direction and plan to them – it could be investing in European commodities, in the broad US market or anything in between. When you go to a financial advisor, they analyze your specific needs and match them against many mutual funds to come up with the best possible fit. This does not mean that the fund will necessarily accomplish what it sets out to, but you can probably find a mutual fund that LOOKS LIKE it is headed in the direction you need to go.
And finally, the Myth of all Myths – Myth #7: Mutual Funds are safer than investing in individual stocks
This myth is true only if you put all your eggs in one basket (aka invest all your money in one stock). A study by two financial whizzes (Lawrence Fisher and James H. Lorie) found that by owning 16 random stocks, you could diversify away 90 percent of the risk of losing all your money. Buying more than 16 stocks does not accomplish much more in terms of getting rid of risk. A mutual fund, which generally holds anywhere from 50-100 stocks, is not really THAT much safer. But still, the myth holds, if only slightly.
So True or False: This article was very helpful? Leave your answer in the comments.
If you feel that mutual funds are not the way to go for you, you should try to manage your own portfolio by learning how to trade stocks on Wall Street Survivor.