Monday, March 9, 2015

Stock Picking 'Guru' Jim Cramer Says Actively Managed Mutual Funds Are Too Expensive for Individual Investors ... He's Right About That

The individual investors' self appointed guru, pundit and TV personality Jim Cramer hits the nail on the head when he opines that stock brokers and other sellers of actively managed mutual funds are interested in achieving only two things --- (1) increasing the number of individual investors to whom they can charge fees and (2) charging high fees to those individual investors. That's their 'profit' model.

It's simply the way things work, and it usually doesn't work to the benefit of the individual saver and investor --- not even close. So as individuals we should beware of the motives of the sellers of financial products and think for ourselves when saving and investing --- which we all should do.

Mutual fund investors are hosed: Jim Cramer contains some valuable advice for individual investors:

"Mad Money host Jim Cramer, best known for offering stock tips on cable TV, is quickly becoming famous for taking what would seem for him a contrarian viewpoint — that investors should avoid stock-picking mutual funds like the plague.

Actively-managed funds are in one business and one business only, Cramer argues. They must grow their client base to maximize their own fee income, regardless of performance.

The incentive to pick better investments just isn't there. Cramer thinks mutual fund investors are getting hosed. Managers get paid to bring in new clients — not for paying attention to the companies they buy for those clients.

"The companies that run these funds want your money. And the biggest mistake you can make as an individual investor is to give it to them, with a few significant exceptions," Cramer said.

Instead, he says, use index funds that track the whole market. If you can get exposure to the strength of the market without taking on the cost of actively managed funds, why not? "At the end of the day, I think a cheap S&P 500 index fund is the least bad way to passively manage your money — better than the vast bulk of actively managed funds," he said.

Steady growth

It makes a sick sort of sense. Wall Street rewards uninterrupted growth, yet the stock market is a notoriously unsteady source of growth in the short term. Some years stocks go way, way up. Some years they fall back.

Publicly-traded investment firms can't afford to live by those rules . . . .

How do you guarantee steady, strong growth in a stock market that fails to cooperate every single quarter? You don't worry about the stock market at all. Instead, your profits are tied to increasing the level assets you manage. You need new clients.

Assets under management isn't the worst business model in the world. . . . But you have to ask what you get for your money, and you have to be sure the cost reflects actual value.

Consider this: For a fee of 1% of your assets, an active manager is going to buy some stocks in your name. He or she also is going to buy some mutual funds, basically farming out the stock-picking to others. The mutual funds charge their own fees as well, which you pay. . . . The vast majority of investors miss this in the fine print of the prospectus, but it's true.

Slim chance

You also pay a fee to help mutual funds market themselves, bizarrely enough. You pay for the research they buy, secretarial help, the electricity bill. All in, you're likely paying something well north of 2% of your assets a year, every year, forever.

For what? A slim chance of beating the market...and a nearly sure bet that your investments will radically underperform the market, even before all of their fees are taken out. Do you get actual, personalized financial advice? The occasional email? Do you even remember the name of your financial adviser?

You should pay less and get more. You should know the name of your adviser and be able to call him or her up at any time. You should see your portfolio capture the market while adjusting for your personal level of risk tolerance.

Yes, Cramer wants you to pick stocks. But, he points out, if that's not what you want to do with your time, just buy an index fund. If you need help keeping a portfolio in balance, you can get that, too. There's just no reason to pay crazy high fees to achieve what should be a simple, clear-cut goal — retirement."

Summing Up

Individual investing can be fun and profitable as well.

That said, unless you are willing to (1) take the time and make the effort to take the DIY way or (2) know that the individual acting on your behalf and investing your hard earned money is knowledgeable, charges low fees and is acting in your best interests, you are best advised to invest in a low cost passive stock index fund such as the S&P 500 offered by both Vanguard and Fidelity --- and hopefully by your employer as well.

That's my take. Jim Cramer's too. And Warren Buffett's as well.

Thanks. Bob.

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