I think Actively Managed Mutual Funds are Horrible. There are many reasons for this, and this article will discuss a few important ones.
Now, I know you may not agree with me about this, but hear me out, because there are alternatives to these investment funds that many people prefer – and who knows, maybe you could become one of them.
Actively Managed Investment Funds Trade Often, Hire Many People and You Incur Huge Fees
Actively Managed Investment Funds are bad because the stocks and other investments they may hold are traded pretty often, and that means actively managed investment funds will have to pay frequent commissions. The commissions then will impact the returns that they give, making it worse than what it could have been if they didn’t trade so often.
Timing the Market
Plus, one other thing I hate about Actively Managed Mutual Funds is that they try to time the market and pick winning investments. I firmly believe it is impossible – I repeat, impossible – to time the market and/or pick winning securities consistently.
In doing this, they end up incurring lots and lots and lots (I could go on) of commissions that you end up having to pay.
Hiring Stock Analysts
Over and above this, these mutual funds also need to hire stock analysts to select the investments.
Higher Expenses, Lower Returns
These are 2 unnecessary expenditures for Actively Managed funds that are totally avoidable. And worst of all, these expenses get taken out of your pocket!
Furthermore, all the managers and trading usually fail to even match the general market – forget beating it – even with an army of researchers at the ready to find any piece of information, study, and analysis possibly accessible to humankind.
Diversification of Investments Can be Accomplished Without Actively Managed Mutual Funds
Now that you have read my 1st reason and are sticking around, perhaps you are a bit interested in what I have to say. Onward to Reason #2.
I think that Actively Managed mutual funds are a poor choice in a portfolio because even though these funds do provide diversification, there are many other options that do the same… and without the tremendous fees. You should note that there are some benefits of actively managed mutual funds, like the possibility that the fund does beat the market – but that possibility is rather slim.
Needless to say, I believe there are many much, much, much better choices out there, just waiting to be used.
Passively Managed Mutual Funds are a Better Investment Than Actively Managed Mutual Funds
Now, I told you earlier that there were other alternatives to actively managed mutual funds, so I’ll talk about them now.
There are 2 major alternatives to these mutual funds that may provide the same amount of diversification – without the constant commissions and frivolous fees. Both alternatives are passively managed – they don’t trade often, and therefore don’t incur large commissions. And they also don’t need to hire many people.
Alternatives: Passively Managed Exchange Traded Funds (ETFs) and Index Funds
These 2 alternatives to actively managed mutual funds are Passively Managed Exchange Traded Funds (ETFs) and Index Funds.
Passively Managed ETFs invest in the entire market, or a certain area – or sector – of the market. As do Index funds. Also, Index Funds – as you may have guessed – are funds that invest in the stocks within an index (Like the DOW 30 and S&P 500).
Both of these funds don’t aim to beat the market – instead, they admit that doing that is impossible (or as I would say, “i-m-p-o-s-s-i-b-l-e”), and try to match the broad market.
Whether it is a certain sector, or the market as a whole, I believe Passively Managed Exchange Traded Funds and Index Funds are a superior investing decision than Actively Managed Mutual Funds.
Now, using all the evidence shown in this article, I am (finally) very happy to say “I rest my case”.