It is NOT true that mutual funds are always your best investment option, even though some in the financial media present them that way

This is seriously misleading and those who don’t get the truth may have their life dreams seriously imperiled, so pay attention. How many times have you heard a radio personality, a so called financial guru, tell you that all you have to do is invest in mutual funds and you’ll get a 10% or 12% return? Goodness gracious, there are so many things wrong with such an outrageous statement that I almost don’t even know where to begin!

First, there are over 23,000 mutual funds, that’s right – twenty three thousand! Some are large, some are small. Some invest in short term paper, some in energy, others in growth stocks, others in value stocks, some in bonds, some only invest in Europe, some only in Asia, some in south America – and the list of differences goes on and on. So, my first problem with the myth that “all you have to do to get a 12% return is invest in mutual funds” is… which ones?! My next problem is even more perilous. I don’t know which of the 23,000 funds he is referring to, and neither do these gurus say over what period of time they are referring.

So, let’s be fair. I considered the top 25 mutual funds over both a 5 and a 10 year period ending this spring. Guess what. The very BEST performer only achieved a 7.6% return over the last 10 years, and the worst performer returned a MINUS 2.56% to their investors. The average for the top 25 mutual funds over the last 10 years ending late this spring was a miserable 2.7%. And the five year returns were even worse than THAT! Now, let’s put this information into a real life scenario. You want to invest $50,000 toward your retirement, but you don’t know what to do. So, you listen to a financial guru on the radio, buy his book, go to his web site and decide to follow his advice and invest in mutual funds, say the top 25 largest. Had they achieved the supposed 12%, at the end of 10 years, your $50,000 would be worth over $165,000. Not too shabby. But in actuality, since the top 25 funds only averaged 2.74%, your $50,000 would have only grown to just over $65,000. Woopdeedoo. You just lost $100,000.

And here’s another secret: you had to pay income tax on interest, capital gains and dividends all along the way. Ouch! No, there is no way to predict what the stock market will do. That’s why at the bottom of every mutual fund prospectus there is a required statement that reads – past performance is not an indicator of future performance. Don’t buy the mutual fund myth. Sure, mutual funds can be an excellent part of your overall financial plan. But not the only part. Consider diversifying with alternative investments, different kinds of annuities, privately managed accounts and even cash value life insurance which has the unique benefit of growing tax deferred.  

But banking on a double digit return from mutual funds is simply a myth… that just got busted!