Mutual Funds with Marc Montini

Mutual Funds with Marc Montini

While reviewing a prospective client’s existing portfolio, it is not unusual to see the portfolio filled with only mutual funds. Few people are aware that this may not be the best approach to asset management.  With that being said, here are a few problems with mutual funds that we have identified.


No flexibility for the mutual funds management.

If you purchase a large cap value mutual fund, the fund manager is legally obligated to only purchase stocks that meet those criteria.  What if that asset class is not poised to perform well in the current economic cycle?  In 2016, large capital value companies did very well.  In 2017, the economic cycle shifted and large cap value companies under performed while large cap growth funds performed very well.

 
Passive management or buy and hold


The economic cycle should dictate how your money should be invested.  The traditional stockbroker model of buy and hold may not allow you to capitalize on market up trends and could result in losses when the market trends downward. Asset management today means that someone is watching your money and prepared to make adjustments as long as those adjustments are done in your best interest.  This is the fiduciary standard. 
 

Under performing the bench marks


Recent data from S&P Dow Jones Indices showed that for the last 10 years 85.1% of large cap fund managers under performed against the S&P 500.  For the last 15 years that percentage jumps to 91.6%.  In addition to that, cheaper indexed funds may provide more opportunity for upside earnings.  All in all, the challenge is knowing which index fund best matches your goals.


Mutual Funds & Fees 


Few people understand that mutual funds have two types of fees.  The first is the expense ratio, which is how the fund manager is compensated.  The second is 12-B 1 fee, which is what the fund manager charges to market and sell more of their fund.  Furthermore, this is in addition to the management fees. Charged by the bank, brokerage firm, or broker. With that being said, these additional fees could add up to .5%-2% depending on the specific mutual fund.  
 

Mutual Funds & Taxes


For non-qualified assets, mutual funds may not be the most tax advantageous way for you to invest.  A mutual funds manager can adjust the holding of the fund by buying new assets and selling older assets.  If the buy and sell occurred in less than a year, short term capital gains are triggered and taxed at ordinary income tax rates.  If the assets were held for more than one year long term capitol gains taxes will range between 0-20% depend on your income level.
 
So, what’s the solution?

In conclusion, it depends on what is trying to be achieved.  Remember, you must always have a clear-cut goal. We advise to make sure that goal matches the way you are invested.  With that being said, we welcome you to schedule a no cost consultation with our licensed fiduciary to help you evaluate whether mutual funds are right for you.  

Call (480) 428-8005 or CLICK HERE to schedule your one-hour Mutual Funds appointment.

Written by Marc Montini, IAR and Licensed Fiduciary.

 

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