Yes, the prudent and convenient thing for most people is to do their stock-market investing via no-load, low-expense mutual funds. But does that mean we all do? Hardly.
Herewith, direct from someone who has actually walked past the Ed Sullivan Theater in midtown Manhattan . . . The Top 10 Reasons NOT to Buy Mutual Funds:
10. Just not as darn much FUN as picking stocks yourself.
9. Lust for control. Well, I’ll admit it: control is a big thing with me.
8. Tax timing. With a mutual fund, your taxable gains and losses are realized largely by the fund manager. (YOU only get into the act if you choose to cash out of the fund itself.) On your own, you can arrange to take losses for tax purposes and let your winners grow untaxed and/or wait until gains go long-term. Not that this matters in a tax-sheltered account, or that you should ever let the tax tail wag the investment-decision dog — but still.
7. Can’t give appreciated securities. If you give to charity, there’s a big tax advantage in giving appreciated securities you’ve held more than a year. Say your mutual fund is sitting on a stock — Intel, perhaps — that’s up ten-fold . . . but it’s mixed in with all its other more mediocre holdings, and your fund shares themselves are up only modestly (or maybe they’re down). There’s no way to pull out just the Intel shares to give away.
6. Have to pay a management fee. Own a stock directly, and you get all its dividends and appreciation for yourself. Own it through a mutual fund, and the managers take a slice.
5. Have to pay administration fees. But at least the managers might be doing some useful research or making some savvy decisions. On top of their slice, you’re also socked for your share of the cost of printing up all those prospectuses and quarterly statements and answering the 800-number — all that stuff. It’s a drag on performance, plain and simple.
4. Loads. Most people still buy load funds — funds that charge a commission, either up-front, as a surrender fee, or via an annual “12b-1” sales fee. Yet another drag on performance.
3. Miss out on tiny stocks too small for funds. Few mutual funds can invest in small companies. For one thing, it’s just not worth their time. For another, buying — and eventually selling — $1 million worth of some small, illiquid company is bound to drive the price up (and then down), making it very expensive to get in and out. But some of the best, albeit riskiest, opportunities lie in these “micro-caps.” The little guy, with his/her 100-share or 500-share stake, can move in and out with relative ease.
2. Don’t get to vote on stuff. If you own shares through a mutual fund, you don’t get all those annual reports, you don’t get to approve the auditors or vote to toss out the board. (Not that any boards ever ARE tossed out — personally, I just toss out the proxies.)
And the number one reason not to invest via mutual funds . . . a little number one music please, Paul:
1. Not invited to the annual meetings!