Business/Finance: Funds Cannot Serve Individuals

As an investment “pool” for thousands or hundreds of thousands ofinvestors, mutual funds are “packaged goods.” An individual can buyor sell shares of the fund, but cannot control any other aspect, suchas the timing of individual stock sales or purchases within the fund.In fact, mutual fund investors do not actually own the stocks in thefund, only an interest in the fund itself. Because individuals cannotcontrol the sales within a mutual fund, they cannot manage the taxconsequences.Many companies offer a wide range of mutual funds, but typicallyadvertise only the ones with the best performance. Of course,past performance is no guarantee of future results. The really greatfund managers sometimes end up managing so much money thattheir choices become constrained. As you can imagine, it’s a lot morechallenging to invest $15 billion than $500 million. For one thing,they have to buy a lot more stocks and/or much larger companies;this drives performance closer to the market average. But if they buytoo much of any one company, they risk a loss of liquidity becausethere may not be a market for their shares, or the sale of their sharesmay be too disruptive to the share price. Often, the best managersmove on to more lucrative “hedge funds,” or simply devote moretime to managing their own accumulated wealth, acquired largelythrough client fees.A Las Vegas tourism billboard on the I-15 freeway in Californiaproclaimed “Seven Deadly Sins; One Convenient Location.” Thissums up our feelings about most mutual funds, which are a repositoryfor bad investing habits. Many people do not have the time andresearch resources to manage their investments, and this is one reasonmutual funds have been so popular, despite their mediocre performance.