Why Investing in Mutual Funds Could Jeopardize Your Retirement Plans
Unfortunately, since many financial advisors working today entered the business in the 1980s and 90s, during the best stock market in US history, they became stock market specialists, favoring growth instead of income. Many of them also became heavily focused on mutual funds. Mutual funds, in general, are a murky pool of investments that only publish their holdings once a quarter. That means in the middle of the quarter, you don’t know what stocks your money is invested in. And when you do find out, you may not always be getting an accurate picture. That’s because sometimes, fund managers will engage in something known as “window dressing”. Here’s how this tactic works:
Let’s say that during the quarter, a particular stock that the fund owns drops in value significantly and receives bad press. The fund manager may not want to sell it because its price is down. However, he might go ahead and sell that stock just before the quarter ends, so he doesn’t have to disclose that it was in the fund — but then he’ll go ahead and buy it back again when the new quarter starts. This is window dressing and it’s one of the problems that can result from the lack of transparency in this murky pool of investments.
A Bigger Problem
Another problem with stock mutual funds is that they are geared toward growth and not income. This could be a big problem if you are retired or nearing retirement and the growth you are counting on turns into a loss or a series of losses. The reason most stock funds are geared toward growth is that they are all judged against the performance of the stock market, typically the S&P 500 Index, which doesn’t have a particularly high dividend. So, fund managers are all trying to beat the S&P 500, or at least trying not to underperform it.
If these fund managers were to focus on high-dividend-paying stocks (which is a strategy that typically makes more sense for most investors in retirement or near retirement age), then in some years they would likely outperform the S&P, and in other years it will underperform it. But fund managers know investors have short memories. So even if their fund experiences a couple of good years in a row and then has a year where it underperforms the S&P 500, investors may leave the fund. This is why fund managers are always trying to avoid underperforming the S&P 500 by focusing more on growth instead of income.