If you can avoid the deceptive claims for your 401k investing plan, hidden investment risks and half-baked 401k strategies, you can, in fact, use mutual funds to fund your retirement years.
Before you sink another dime into a mutual fund, learn how to see through the baloney and turn your fund portfolio into the retirement nest egg you deserve. Here are seven deadly mutual fund mistakes to avoid.
Mutual Fund Mistake #1: Index Fund Investing
Lots of people say that index funds are the only investment you need, but indexing is not the best answer. Take Vanguard’s 500 Index, for example. It’s the family’s largest fund, with more than $95 billion in assets. In fact, it’s one of the largest mutual funds in the world.
But it’s not the safest index fund, nor is it the best-performing index fund. During the tech bear market, investors lost more than $40 billion with the fund. And 20% of the fund’s assets are tied up in just 10 stocks and nearly half of its assets are invested in just three sectors.
Mutual Fund Mistake #2: Jumping Into Bubble Sectors
You’d think that after the tech wreck and mortgage meltdown, investors would steer clear of sector funds, but they still make that mistake at Vanguard. Billions are still pouring into these mutual funds.
But remember: Buying into a sector fund is actually a form of market-timing, which individuals never seem to master. And what many investors also don’t realize is that sector investing is expensive (minimum investments hover around $100,000) and their performance over the long haul simply isn’t worth the price of admission — only half of the ten major stock market sectors that Vanguard follows have generated market-beating returns.
Mutual Fund Mistake #3: Taking ‘Closed’ For an Answer
Have you ever heard about a hot fund and gone online only to find out that it’s been closed? It’s happened to me and countless other Vanguard mutual fund investors, and if I’ve learned one thing it’s this: Don’t give up!
First, you can wait until the fund reopens. In the past year, Vanguard has reopened several of its top-performing closed funds to investors in its Flagship program. And a series of well-known value investing shops, from Tweedy, Browne and Dodge & Cox, reopened their own closed funds after the markets plummeted from their previous highs.
But if you’re not sure that a fund will ever reopen, you can use my “back door” strategy… AND the back-up plan that may work even better. And they’re both legal, too!
Mutual Fund Mistake #4: Not Knowing Your Funds’ True Risk Potential
Don’t think the best way to measure Vanguard mutual fund performance is the 3- and 5-year rankings you get from Morningstar or in the financial pages. I’ve developed a much better system called Maximum Cumulative Loss (MCL).
MCL measures the largest, historical loss that a long-term investor in a fund would have experienced, from high to low AND how long it would have taken to recover from the loss. The lower the number, the safer the fund.
For example, Vanguard’s oldest index fund, 500 Index, has an MCL of 51. A poorly managed growth fund (U.S. Growth) has a higher MCL of 71.4. A well-managed growth and income fund that routinely beats the market (Dividend Growth) carries an MCL of just 41.5.
Mutual Fund Mistake #5: Thinking Tax Efficiency Means Guaranteed Profits
Tax efficiency doesn’t necessarily translate into better after-tax returns, nor does it tell you which funds are “best.” I’m sure you’ve heard that index funds are tax efficient, and that this makes them attractive.
Take Growth Equity, for example. Because of all the losses the fund has sustained, it’s got the best 5-year tax-efficiency of any Vanguard fund, at 99.7%. Does this make it a buy? Absolutely not! It substantially underperformed its large-growth peers and generated a return that was below that of the stock market.
Mutual Fund Mistake #6: Relying on Vanguard’s Performance Numbers
Vanguard management isn’t lying, but it measures performance in what I consider to be a very misleading way. They average annualized returns from the start of every year.
This method assumes that investors put their money into funds at the beginning of the calendar year and keep it there for the next 12 months. But do average investors do that? Of course not. And the result is that actual returns are often much lower.
Mutual Fund Mistake #7: Not Getting Independent Advice
If you’re ready for the inside help that gives you special advantages over other investors at Vanguard, sign up for Dan Wiener’s free online newsletter, Fund Focus Weekly.
Each week, in every issue, Dan will show you all your options and tell you what Vanguard can’t — and in some cases won’t — tell you. You’ll get independent and unbiased in-depth information on Vanguard funds, including the best funds to buy, alternates for closed funds, advance warning of funds likely to close, changes in management and much more.
He’s been doing it for over 18 years for his subscribers, and his track record of providing a 119% advantage over the average Vanguard investor is proven and irrefutable. Sign up today — FREE!
