Sushi Money

By now you’ve probably read the provocative article on Yahoo, Mutual Funds are for Losers. If not, take a look- it’s a good read and offers some excellent insight into investing strategies. But what about the premise? Based on the article, it’s not just a catchy title. The author interviews Phil Town and he really believes what he says, based on his experience. Do you agree? I don’t… and according to his metrics, that places me right in the loser category.

Normally I’m not bothered when so-called experts tout their strategies, their philosophies and their approach to business and investing. We can learn from the experience and knowledge of others. But why take an approach that blasts millions of people as losers because of their investing strategy? Hell it’s more than that… millions of people who put money in their 401(k) everyday as well. Are they losers too? Apparently so.

Do I disagree with his approach to investing? Absolutely not, and he makes a great case for value investing, research, due diligence and taking risk at the right time. By his own admission however he struck gold at an opportune time and his life has never been the same. Not everyone is going to do that. Many people have families at a younger age that they work very hard to support, and just finding some portion of their monthly income to set aside to invest each month is amazing. Are these people going to have enough money to buy a “good stock” and watch it make them rich over time? Maybe, but I doubt it.

The old axiom that says “It takes money to make money” is pretty accurate, and that’s why “the rich get richer.” Many people also don’t have the luxury of a risk profile that will let them put a ton of money into a few stocks they can hold for a lifetime. Mr. Town cites Warren Buffet’s quote that “Diversification is a protection against ignorance.” But how many people have the knowledge, experience and time to learn to tell the difference between a “wonderful business that is on sale and a bad business that isn’t?” Most people are simply not going to get there… we have millions of citizens who can barely make ends meet each month, keep debt levels down and who are trying to make a better life for themselves and their families. But I guess they’re all losers if they invest in mutual funds instead of stocks.

So Mr. Town, let’s say you have someone with millions of dollars who has an asset manager or financial planner to handle their assets and investing strategy. Let’s even say they don’t invest in mutual funds. So because they invest in individual stocks they are not a loser? Yet they’re paying the same percentages or fees to someone else to manage their assets, so they should fit right in to your loser definition. What about hedge funds? All those people dumping tons of money in hedge funds… they’re not losers? By the same definition, they should be, because they pay huge fees for the privilege, and opportunity, to make enormous sums of money in return.

I understand the point of Mr. Town’s approach… find superior companies at bargain prices, stay with them and watch your money grow. That is a wonderful approach, but I also think there are a few mutual fund managers who embrace that same approach. In my opinion, it’s not a bad thing to pay a mutual fund manager for their expertise and time, just like a wealthy person may pay an asset manager or planner a percentage of their portfolio over time. But I do believe in finding superior mutual funds with bargain priced management fees such as those offered at Vanguard. Expense ratios are very important, and paying too much for a mutual fund is indeed a losing proposition.

But just because people invest in an actively managed mutual funds doesn’t make them losers. In my book, just the fact that they are saving and investing makes most of them long-term winners because they’re ahead of many other people in the nation. Historically, almost half of all employees don’t even invest in their 401(k) over time! We’re trying to get more people to save and invest in the first place, and at least now with automatic enrollment for 401(k) plans, employees will have a better chance at establishing long-term retirement savings. And where are most employees going to put their money? Many buy company stock, but more now have the opportunity to invest in… you guessed it, mutual funds.

So why diversification? I’ll be the first to say that I’m ignorant to many aspects of investing and market dynamics. Nobody knows it all. Most people know very little about saving and investing. Some people don’t want to know anything about saving and investing. And there are always things we can learn, and many areas of investing and economic change that we cannot plan for.

Diversification protects me not only from my own ignorance, but the ignorance others.

I’ll bet a few folks at Merril Lynch, Citigroup, Bear Stearns and a few other companies could have benefitted from a little more diversification over the last year. How much money have people, and businesses, lost over the last few years because of taking on too much risk, with too little diversification?! Maybe that’s what gets me a little steamed up about this article… I think the loser viewpoint is careless and doesn’t factor in degrees of risk, or how easy it is for a retirement portfolio to be destroyed in a very short amount of time. Nobody gets it right all the time, and even good companies can fall on hard times.

Diversification, and asset allocation, gives most investors the opportunity to balance risk with reward over time. We may not all become millionaires or billionaires. But with a little time and discipline, we can achieve a solid retirement portfolio that will make our future a lot more secure. What do you think, are mutual funds a losing proposition? Do you have a different strategy?

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