This morning on National Public Radio, the Market Watch Report spoke of the huge outflows year to date in domestic equity mutual funds. The analyst posited that people had gone through too many bad markets and lacked confidence in the market and economy now. She said she believed a permanent reduction in allocation to equities had taken place.

Our view of this is quite simple. First, people have been systematically led to believe that investing in stocks for the long run is safe and effective.  The truth is that research shows a lower allocation to stocks (and to bonds!) than the traditional portfolios typically make is simply a better way to go. You can increase your returns and decrease your risk by adding other types of assets to the mix. This fact is not welcome in traditional investment houses, but is born out in many places- We recommend either Dr. Craig Israelsen’s 7Twelve or Mebane Faber’s The Ivy Portfolio as a great place to start to educate yourself.

Second and just as important, there are thousands of mutual funds and the majority of them are not managing your risk. They are concerned about benchmarks, style boxes, all sorts of things about which you could care less. What you care about is your money!!! You entrusted it to professional managers in order to make it grow through the miracle of compounding. You value return on capital, but also need return of capital. The majority of domestic equity mutual funds are not set up to protect your investment in bad markets. If you were told this when making an investment, you would probably not hire the manager. Would you go to a doctor who promised to take good care of you when you are well but who would rather not treat you when you are sick? That is essentially what you are getting from many fund managers. Good results when the market is healthy and poor results when the market is ill. Not enough-so, outflows make a lot of sense to us unless you find funds that put your interests first.

Comments are closed.