The Fund Investor

A lot of financial advice written on the Internet assumes that the reader is very rational, the market is fairly rational, and everything will go smoothly. We all know that is not the case in the real world.

While a lot of sites will nitpick mutual funds, complaining about the 1% fee or so, the truth is that by investing in a good mutual fund, that 1% fee will go a lot further saving you money down the road by preventing you from making your own mistakes than the amount you pay the fund family.

All investors want to beat the market; few people are happy just tracking the market. Yes, it’s irrational since it is very difficult to beat the market, but that is the truth. Most just are not happy keeping their money in an ETF.

Therefore, many investors start buying and selling stocks on their own. Often, this can lead to disaster. Investors will often get too aggressive during good times and then panic during bad times; they’ll buy high and sell low. Investors will often overleverage, borrowing far too much on margin.  Investors will often not diversify, sometimes they won’t even realize how undiversified they are.

The hidden advantage to mutual funds is that a mutual fund prevents a lot of these mistakes. Mutual funds, since they often hold hundreds stocks, are a form of instant diversification.  By being able to ‘choose’ a mutual fund, an investor can satisfy his or her desire to beat out other investors, while at the same time not be lulled into situations where he or she will buy high and sell low.

In short, mutual funds can often save you from yourself. That’s where the 1% fee really is going towards, insurance from yourself.