A Brief History of Mutual Fund Folly
Before we introduce our iMoney strategies, a little history is in order. No, we’re not going to tell you about the Treaty of Ghent. Let’s look at the history of mutual funds for a bit. Outside of your home, your most valuable assets and favorite investments are probably mutual funds and stocks. If you’re like most investors, it’s where you have most of your money: your 401(k), your IRA, your children’s savings accounts, and your long-term savings. It’s a long tradition: Mutual funds and stocks have been the investment of choice for the vast majority of Americans for decades. If you work with an investment advisor, financial planner, or brokerage company, they’ve directed you to them, too. Today more than $10 trillion is invested in mutual funds in the United States alone.
The last decade or so has seen a change in the air. Those warm feelings investors once had toward their mutual funds, in particular, have slowly begun to grow cold, and it shows. The trust once freely given to mutual funds has flown out the window as poor returns and white-collar crime have tarnished their reputations.
A market crash should provide lessons for every investor, although far too many have short memories. In March 2000, the stock bubble popped. By fall 2002, the S&P had declined 46 percent from its peak and the NASDAQ lost a staggering 72 percent of its gain, known as “giving back.”
Mutual funds were not immune to the fall. Fund managers can do only so much to avoid having their funds follow the market. They suffered equally, to the surprise of most of their shareholders, who expected their managers to outperform the indexes. They were paying good money for the expertise of these managers, and they didn’t seem to be getting it. Stock mutual funds declined en masse, and some of the high-profile funds gave back much more than the S&P 500. Even balanced funds, those invested in both stocks and bonds, suffered, to the dismay of investors who selected them as a more conservative investment.
Billions of dollars flowed into aggressive growth and technology funds in the late 1990s as a result of mutual fund companies spending millions advertising and pushing their high-flying funds. Remember those days when you couldn’t open a newspaper or magazine without seeing a mutual fund company touting its funds? Those aggressive growth and technology-heavy funds touted glowing track records as if these exorbitant returns would continue forever.