Thursday, March 13, 2008

The Illogical Mutual Fund Market Reprinted

Reprint, originally appeared June 7, 2006

Our Mutual Funds and Investment Retirement Accounts have built up assets, by "investing" in the stock market and the bond market. They know nothing about the psychology of the market. However, they do know how to purchase stocks and bonds. The real problem, the market is not logical in its execution, to borrow some famous words by Mr. J.P. Morgan, "The market fluctuates."

As long as the market goes up, mutual funds and IRA's will do OK. It's the drop that will ruin the investor. At first, most will hold on, those profit and loss statements only arrive every quarter. No one will even notice the initial drop. Want to pull the money out? Well, the penalties are more than one would expect. There is the early withdrawal penalty from the fund, and income tax consequences--what a nightmare. Adding insult to injury, the losses are not tax deductible.

The question that comes to my mind is this; while the market goes up everyone hops on and rides the wave, when the market starts to drop, where is the alternate plan of action? This drop in the market will leave the mutual fund managers in a vacuum. People will soon realize that these managers don't know any more than anyone else. If these guys are so good at what they do, why do they need your money? Answer; there is no risk if they use your money.

Investments recommended by the government tend to burn you in the long run. The government has always done its best to mess up the person saving for retirement by changing the rules after the game has started.

What happens when all these fund managers start to sell? The real question you need to ask is, "Who's going to be buying?"

Copyright 2008 All rights reserved


Anonymous said...

I'm sure Bernanke is doing a cost/benefit study regarding whether to let these banks go belly up or not.

However, if the banks pay their FDIC insurance premiums, the Federal cost of reimbursing depositors should be minimized right? Why pour billions of taxpayer money into keeping them afloat when, for all intents and purposes, they SHOULD go bankrupt? Why prolong the agony?

Anonymous said...

Depending on when they sell, I'll be buying. :-) There is a lot of money sitting on the sidelines right now, and it's hard to get good returns. I'm making 5% on CDs set to expire in the next few months, and then what? 2 1/2% CDs? That won't even keep up with inflation. I'm not complaining - by moving to cash, I've avoided huge losses, and that is literally money in the bank. But now what?

Most people don't pay attention to the economy or the markets; they just sign up for retirement accounts, set it and forget it. Money goes out each payday, a statement comes in each quarter, and just hope it's enough to retire on someday. Until they start retiring, it's guaranteed buyers for stocks.

Jim in San Marcos said...

Hi Anon 11:45

The banks are not the problem. It's the IRA's and mutual funds that are at risk.

The people that own these assets comprise the whole United States and many foreign countries.

Right now, probably 1/3 of our uninsured nest eggs are toast. By next year it could be 2/3's.

This money has been lost by real people like you and me, not some abstract institution like a bank or mutual fund.

The only trouble right now, is that no one knows who owns what, or for that fact, who lost what.

Jim in San Marcos said...


I wouldn't be in too much of a hurry to buy. Stocks in 1931 were down 90% from their highs in 1929.

The interest on a CD over the next couple years is rather academic.

I bought gold at $230 and didn't get any interest for 15 years.

I would expect to see deflation with the collapse of the bubbles as a first stage. Inflation would be the government solution to fix it and it would probably take a few years.

Your best bet would be to diversify and plan for both.