Why You Shouldn’t Own Mutual Funds

Taxes take a big chunk out of taxable mutual funds (MFs). Recent tax exemption laws will eventually come to an end and it would be wise for investors to keep an eye out for one of the main obstacles to performance, taxes.

A key reason mutual funds paid such high taxable distributions in recent years is because they can no longer carry forward the large losses incurred during the 2000-2002 bear market, which had been used to offset gains in recent years.

Estimated taxes paid by taxable mutual fund investors increased 42 percent from those paid in 2006. Holders of purchase and withholding (MF) taxes delivered a record $ 33.8 billion in taxes to the government, surpassing the 2000 record amount of $ 31.3 billion!

Over the past 20 years, the average investor in a taxable stock fund has paid the equivalent of 17 to 44 percent of their income to taxes. In 2006, the tax bite totaled a hefty 1.3 percent of assets, beating the average stock fund expense ratio of 1.2 percent.

Mutual funds probably have no place in the portfolios of high net worth clients. There are many powerful reasons in favor of this position, but the most immediate: You have probably noticed that every year when you receive your statements with the year-end 1099 in the mailbox and discover that a considerable amount of your earned cash with so much effort is going to Uncle Sam.

If you were to subtract 50 percent (93 million more) of mutual fund holders who hold stock fund assets in tax-free accounts, such as 401 (k) plans and IRAs, and a small amount in institutional and trust funds that make a few investors tax-exempt, this would leave about 48 percent of the country’s investors (MF) in taxable funds.

The SEC says that the average investor in this taxable group loses 2.5 percent of annual tax returns each year, while other research puts it at 3 percent. Throughout your life, you can see that capital gains taxes will substantially reduce your investment income when you retire.

You know the numbers. Sure, during the 1980s and 1990s, people made money by selectively investing in mutual funds. Even today, it can still be done; however, more than 90 percent of them have underperformed the stock market as a whole over the past five years. You can get better odds at the racetrack.

Here’s how it works: An (MF) with higher business costs and high built-in tax limitations creates an after-tax return that potentially offers fewer returns than a similar separate account.

These funds kill your potential to become performance superstars due to their high trading volume and killer fee structure. Too much trading leads to increased taxes, while high fees reduce return on investment (ROI), period.

If you own your own shares, you are in control. With an (MF) there is no such thing as: there is no control over which stock fund managers buy and sell, there are no purchases of a particular type of stock to balance a portfolio, and you cannot opt ​​out of any asset class or company in particular.

On the other hand, if you put yourself on a separate account, you are the boss. Having a separate account means that you are in charge. You set the strategy and decide which stocks or bonds make up the portfolio. You also have access to the best money managers and you can even change managers if you want.

The combination of separately managed accounts (SMA) makes them attractive to the new generation of investors who want more control and participation in their portfolio. Don’t you want more control after the Madoff break and the Wall Street explosion?

With mutual funds, you should be warned up front that you do not own the stocks in the portfolio, but simply own stocks of stocks along with a large number of people. So what are you giving up by investing in mutual funds? Control.

The person who controls the (MF) is the fund manager. Too often, this manager is tasked with dozens or even hundreds of stocks that reside in a pool. This is exactly the situation in many of the 8,000 or more funds on the market: breadth or lack of control.

Furthermore, it is tied to the whims of fund managers, who are often known to rely on “style drift” (buying securities that are unrelated to the fund’s objectives), excessive trading (to increase the value of a fund as a means of driving commissions) and other nefarious actions, first discovered by the Attorney General of the State of New York in 1993 and that have been repeated since then.

MF companies are good at covering up information and pitching their marketing arguments to prevent investors from figuring out exactly what they are paying to own such a fund.

Space limits us to expand all the fees you pay for the privilege of owning mutual funds, but administration fees, distribution or service fees (12b-1), expense ratios, trading costs, commissions, purchase fees, interchange fees, loading charges (loading funds), account fees, escrow fees, etc., are all part of the mix that mutual fund companies use to kill you without the Most of them know the billing score.

The SEC wants every investor to be fully equipped to make informed decisions before handing over hard-earned cash. The SEC requires all corporations to disclose any information that affects their financial positions so that investors can make prudent decisions. Transparency is more important due to the recurring events of the last 18 months.

MF companies provide notoriously slow reports. It’s more difficult to know all the real nuts and bolts (specific stocks, bonds, or cash holdings) of the fund. A (MF) provides you with data twice a year, sometimes quarterly, so the data is out of date long before you receive it. Most investors don’t read their prospect reports, and fund companies are aware of this fact. Even with the introduction of the internet, which has greatly accelerated the tracking of stocks, major fund companies have been painfully slow in keeping investors on top of what stocks investors hold, and if and when those stocks are traded.

Nowhere is the lack of transparency between fund companies more evident than in costs and fees. Fees and management fees are known to most investors, but other fund fees like 12b-1 and trading fees are sublimated. Other fees are hidden and therefore keep investors completely in the dark about what they are paying.

With companies so slow to report fund results; the investor rarely knows in real time what stocks are in his account and companies are known to exaggerate performance results.

Unless Congress steps up and places mutual funds on an equal footing with other investment strategies, investors in taxable funds will have to fend for themselves.