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?"
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