My retired brother-in-law, Jerry, confided to me recently that the value of his investment account has been slashed by almost 50% this past year. Accustomed to playing two or three rounds of golf a week, he’s been forced to cut back on leisure spending and trim the fat from his lifestyle. And he’s afraid. He’s even thinking about going back to work.
I asked him where he’s invested, to which he replied, “Uh, some kind of mutual fund.”
No wonder Jerry has lost so much money. He’s put his entire financial future in the hands of a mutual fund manager. Like many Americans, he was exposed to the stock market through his mutual fund account, but had no idea mutual funds could jeopardize his retirement. He was a sitting duck for the two biggest problems investors have seen in the past 18 months: a stock market collapse and massive mutual fund failure.
“I Thought I Was Protected”
Of the thousands of diversified U.S. stock mutual funds available to investors this past year, only one posted a positive return. That’s right, just one. The Forester Value Fund was up a measly 0.4% in 2008. But past performance is no guarantee of future results. Forester Value Fund is down year-to-date.
During 2008, here’s the breakdown on diversified mutual fund performance:
• Large-cap value funds were down 37.7%.
• Mid-cap value funds were down 38.5%
• Small-cap value funds were down 36.1%.
For 2009, here’s how diversified mutual funds have done so far (through March 31):
• Large-cap value funds are down 13.2%.
• Mid-cap value funds are down 10.7%
• Small-cap value funds are down 15.3%.
The bottom line: Across most categories, mutual funds have lost about 50% of their value in little more than a year. It’s been a bloodbath.
These aren’t just statistics. These numbers represent real losses and real pain for average investors who thought a professionally managed mutual fund was the right choice for long-term financial peace of mind. Jerry said to me, “I thought I would be ok for retirement. I thought I was protected.”
Losing Confidence In The Future
But this bear market has left a lot of people feeling unprotected. According to the nonprofit Employee Benefit Research Institute, a recent survey of Americans found that only 13% of us are very confident about having enough money to retire comfortably. That’s down from 27% two years ago, according to the Wall Street Journal.
Jack Van Derhei, co-author of the survey, says people like Jerry are waking up to the fact that there is "a huge gap between what people think it's going to take to retire comfortably and what it actually takes." Many of these people will be forced to settle for a "much lower standard of living in retirement than what they had hoped for" unless they start making better investment decisions.
Like my brother-in-law Jerry, many Americans have never learned how to investment, leaving those decisions up to someone else. Or they learned only how to make money in a bull market, never realizing there are low-risk techniques to make money in a bear market, too. Because they didn’t know better, they lost large portions of their retirement investments.
Many of these investors correctly feel they are not in control, leading to a lack of confidence and fear. Jerry said, “For the first time in my life I’m afraid and completely unsure what to do.”
I assured him if he would start right now he could still save his retirement. This is the best time in years to learn how to become a more involved, successful investor. Successful investing isn’t hard to learn, you don’t have to go back to school, and you don’t need to make your investing a full-time job. Start simple and keep it simple.
There are a few steps that I shared with Jerry that you should take immediately to regain control over your financial life:
1. Understand why you lost money in this market.
Unfortunately, Jerry had a “Mutual Fund Mentality” about investing. Somewhere along the line he was convinced that mutual fund investing is a low-risk, high-return way to financial success. It’s not.
Mutual funds are riskier than you were led to believe. As a group, mutual funds only make money in a bull market, because the rules require them to remain fully invested at all times. A typical mutual fund manager can’t sell everything, go to cash and wait for the next bull market. In a bear market, that’s a recipe for disaster.
Mutual funds are expensive. You pay the fund’s overhead, including management fees, whether you make money or not. And mutual funds have increased their fees this year, according to MarketWatch. What does that mean to you? Mutual fund investing just got more expensive.
Most mutual funds don’t beat the market even in good times. According to Morningstar Inc., the vast majority of mutual funds fail to keep up with the market averages. Add in the cost of fees and overhead, and you have a losing game.
2. Revise your financial goals.
Whether he realized it or not, Jerry’s retirement goals were built on the expectation that stock markets would continue to rise. How do I know that? Because he invested in mutual funds. They only make money in bull markets.
But markets don’t always go up.
It’s time to revisit your assumptions, factor in how much you have lost, and adjust the average annual rate of return you need to make with the money you have available to invest today.
3. Take the action necessary to realize your new goals.
Mutual fund investing got Jerry into the mess he’s in today, so he must get rid of the Mutual Fund Mentality and learn to invest. I explained to him that for investing in today’s markets, an Exchange Traded Fund (ETF) is a better fit for many people. Why?
Because ETFs have many advantages:
• ETFs can be used to make money in any market, bull or bear.
• ETFs don’t have the management fees and overhead expenses of actively managed mutual funds.
• With ETFs you don’t have to sort through tens of thousands of publicly traded companies, learn how to analyze annual reports and quarterly statements, then spend hours checking and re-checking your numbers to make sure you picked the right stock.
• By investing in ETFs you can take complete control over when and how you participate in the stock market.
I told Jerry it’s time to get over the fear and take control. In future articles we will discuss these topics in more detail, giving you a game plan to reach your investing goals for retirement.