Having learned a few bits of how Wall Street works, one finally realizes the limited benefits or merits of mutual fund managers. Buying, holding and praying on the stock markets (or “share markets” as coined by New Zealanders) doesn’t require any knowledge, in fact, with a few mouse clicks you can do it.
Many New Zealanders have been swindled by these investment deals, and this rampant ploy has become increasingly apparent as an economic recession descends. A deeper look reveals that the managers involved are either incredibly inept or intentionally deceitful.
Basic business models
New Zealand publicly available mutual funds make money purely on administration fees and largely without incentive fees. While this sounds more attractive than the usual 2&20 (2% management, 20% incentive) of typical hedge funds, New Zealand management teams absolutely have NO motivation to provide investors with a positive return. They make their money either way.
Purchase and holding. That basically leaves most days freely available for advertising, widespread promotions, with sometimes deceptive sales techniques. They chart charts of periods of historic growth (often cutting through recession phases) and attract familiar investors who sign deals where the fine print explains the ineffective irrelevance of such pitches.
They exist to provide a false sense of security and sanctuary for the uninformed investor. Administration and initial charge (entry) fees equate to guaranteed losses for investors, and non-active trades often result in the worst transaction prices outside of exchanges. Lack of liquidity results in slow and sometimes very expensive withdrawals in volatile markets, in some cases frozen accounts. Do you understand the drift?
Why are they opposed to “market timing”?
Mutual funds understand that if you, the diligent and open-minded trader, educate yourself on how the markets really work, your fallacies and shortcomings become obvious. They argue that just “buy and hold for the long haul” (with no exit plan) could lead to rewarding gains, because as long as the public remains in the dark, this trading industry will stay afloat.
Are they more informed?
When it comes down to it, they just don’t know any better than you or me. Whichever stocks they decide to “buy, hold, and wait” usually result from not-so-educated guesswork. These people might have had more experience writing falsified reports, but that’s about it. Yes, falsified tracking logs have become quite common in this industry, don’t trust them.
As the New Zealand economy is positively correlated with that of the US, these forms of funds suffer just as much as someone who bought stocks or ETFs on their own. (See chart of NZ Telecom Share Performance vs. US S&P500 Index, ticker symbol “^GSPC”)
This means that these so-called experts expose investors who have no ability or intention to mitigate the risks inherent in long-term stock ownership.
What can you do?
Investing, like any business, will likely succeed as your expenses come down. Even if you still believe in “buy, hold, and pray” schemes, going through a shortcut broker offers much lower rates. My current broker charges only $1+ $0.0025/share per trade.
If you come across an investment run by a seemingly competent manager, do your homework and learn the underlying strategies applied. Just keep in mind that if you are simply buying and holding, you may get higher returns on your own. Here you can find an article about trading ETFs on your own and how you could greatly increase returns by selling reversed stock options.