Buy stocks, mutual funds, or hedge funds
Mutual fund managers get paid based on the amount of money they manage. They don’t get paid on performance, or record, or anything else that is based on how well they are doing. They get paid on how much money they manage.
That is why ‘Buy and Hold’ advertisements are intended to allow mutual funds to keep your money. A very good marketing strategy. A very bad investing idea.
Invest in Mutual Funds, or Stocks or ETF’s
Long ago, when we first started figuring out how to invest our own money, we were faced with some limited choices. Pick individual stocks, or choose a mutual fund, with all the inherent difficulties of having little information, or biased information on which to base our choice. Really the only valid yardsticks to use were historical measurements of performance. As every caution on every advertisement clearly states, historical performance is not a guarantee of future performance.
As we have repeated before, the market is made up of a series of waves. Right now, one sector is jumping up, and another is falling. Next year, another sector will rise, and a different one will fall. Buying based on historical results is like trying to catch a train long after it has left the station.
Being Able to Forecast the Future
An individual stock could dramatically rise or dramatically fall and we would never know in advance when either event could happen, so mutual funds seemed safer. In due course, we discovered that large supposedly ‘safe’ mutual funds actually just were a mirror of picking a representative cross-section of the largest stocks in the DJII or in whatever index. Then, the mutual fund would supposedly mirror the index which theoretically always went up in the long term. So, of course that meant ‘buy and hold’. After a while, when we took a closer look, we started to realize that something was wrong. Somehow, in spite of historical great results, other funds were doing much better after we bought – not the fund that we bought.
So We Started Trying to Learn What Was Going on.
Why don’t 95% of mutual funds do as well as the market index. Slowly we came to realize the game.
Managers of mutual funds get paid based on the amount of money in their fund. They don’t make a reward for performance. Theoretically if they do well and make money for their investors, more money gets invested, their fund gets bigger and then they get paid more. However it really doesn’t work that way. Money is static. It doesn’t move easily. When someone invests in a mutual fund, they generally leave their money in that fund. As long as the money stays in that fund, the Fund Manager and the Investment Advisor both get a commission every month of every year so long as the money stays there.
‘Buy and hold’ is a marketing tool for the enormous marketing and promotion departments of these funds to convince you that you should leave your money with them.
If one compares returns based on ‘buy and hold’, the investor does not do well over the long term. Many studies have attempted to prove or disprove these theories, and mostly these studies are based on misleading premises. The most obvious misleading factor is whether all companies in an index stay in business – think about GM over the last 2 years, think about the large companies that falter, or change, or get added or deleted from the indexes.
Most Performance Metrics Are Distorting
Using benchmarks ignores the reality of whether money is really being made. In order to convince you to leave your money in a mutual fund, all sorts of weird comparisons and metrics have been invented; comparisons to BENCHMARKS, to ALPHA, to similarly valued funds and so on. Achievements based on these wonderfully inventive industry standards are loudly trumpeted. What a bunch of nonsense.
What I would want to know, and what most people want to know is “Did I make a real return on my investment after you guys took all of your fees and after inflation made what remains worth less, and after the income tax authorities took their cut?”. In simple terms, can I buy more tomatoes with my money this year than I could last year?
Getting an answer to that question is usually quite difficult.
Figuring out your broker’s statement is a similar exercise in futility. There is always lots of information. In fact there is so much information, that the real fact of whether you are ahead of the game or behind the game is left for you to find out only by calling your broker and listening to his verbal dissertation of how you are doing.
Hedge Funds were invented to try and address some of these issues
