Why mutual funds are not horrible investments

I have had people tell me that the stock market and mutual funds are a horrible investment. They often tell me about all of the money they lost in 2008 in their 401K plans. Even the President of the United States used this argument in on of his commercials.

“Announcer: Three years ago John McCain campaigned for George Bush's plan to risk your Social Security in the stock market. And voted three times in favor of privatizing Social Security.

So imagine if McCain and Bush had gotten their way, and invested your future retirement benefits at Lehman Brothers? Bankrupt. AIG? Bailed out. Merrill Lynch? Sold.

John McCain; The risk is too great, trying four more years of the same.

Obama: I'm Barack Obama, and I approved this message.”

Clearly Mr. Obama is suggesting the stock market is not a good investment for social security funds and perhaps not a good investment for you as well.

Mr. Obama is not unique in this regard. Sean Hannity has often stated that the stock market is no longer a good investment. He has stated that he intends to take all of his money out of the stock market once it reaches a certain level. For those of you living outside of the United States Mr. Obama and Mr. Hannity are on opposite ends of the political spectrum and have been critical of one another.

I’m not witting this article to discuss politics. I want to help you to be a better investor.

Do not let your emotions drive your investing. The Dalbar study concluded that the S&P 500 index was up 8.35 percent per year while the average investor was up only 1.87 percent per year in the 20 year period ending year end 2008.

Why might the average investor do so badly? The answer is emotion. People buy into funds that have performed well and are near the peak of their cycle. On the other side they tend to panic and sell when the market has nose dived. The stock market has long cycles. The market can drop for 3 years as was the case From March 2000 to March 2003. Conversely the NASDAQ was up well over 15 fold from 1990 to early 2000.

I have seen the market with its ups and downs. Back in late 1974 much like today the stock market was down significantly. I witnessed people saying what a horrible place the stock market was to invest. The NASDAQ closed at 54.87 in October of 1974. It closed at 5048 in March of 2000. That represents almost a 100 fold gain! I do not think that is a horrible investment.

Where I live most weeks the price of gasoline is lowest Tuesday night to Early Thursday morning. Business is rather brisk at those times with people filling their tanks before it goes up. My question is why do people buy gas on sale but run from investments when they are on sale? I’m not going to attempt to answer that question. It is a question you as an investor need to ask yourself before you make the same mistake.

You can avoid all of the pitfalls of investing by generating a great asset allocation for your portfolio. Stick to the asset allocation in good markets as well as bad. Your portfolio may not achieve the 100 fold increase the NASDAQ achieved over 26 years but I am sure you will do significantly better than the 1.87 percent cited in the Dalbar study.

Be it in your 401K, IRA or taxable account stick with your asset allocation. Invest in the very best mutual funds, Small cap funds, International funds, Bond funds and even concentrated funds.

In the year or so since I wrote this hub the market is up 25 percent. I have not heard the politicians bashing the nice returns of the stock market. I wonder why?