Financial Answers "IN SIMPLE LANGUAGE"

I am going to venture to guess that most of the people that read In Simple Language own, have owned, or understand what a mutual fund is.  For those of you that don’t understand what a mutual fund is let me explain.

 Mutual Funds

 A mutual fund is an investment container, similar to a bucket, in which a professional portfolio manager holds various types of investments.  Usually these investments are different types of stocks and bonds.  Now you pay this portfolio manager to watch over these investments and buy and sell what they think will make the best return or provide the most protection from loss for you the mutual fund owner.

 Now we all know what has been going on with the financial markets worldwide and especially in the United States.  It has been a financial nightmare for most of us.  The stock market dropped almost 50% and devastated our financial accounts almost overnight.

 This has created additional problems because if you have been watching the stock market it has dropped from its high of 14,164 on October 9, 2007 to a low of 7,062 on February 27, 2009.  An approximate 50% drop.  As of this writing we are only in the low 9,000 range.  This has caused everyone to become very nervous and very conservative with putting our money back into the stock market.

 That has led to many professional mutual fund portfolio managers to sit on the sidelines with a lot of your cash to invest but reluctant to do so.  You may be thinking that that is a good thing.  Maybe?  It would depend if you had picked the right mutual fund(s) to get back into.  Many funds are up from 10% to 50% in some cases.

 The Problem

 All mutual funds have expenses and you pay for them.  One of those expenses is the fees you pay for the salaries and bonuses of the professional mutual fund managers.  Did you get a notice from any mutual fund company that the fees for the salaries of the mutual fund managers were being reduced?  Fund managers are paid to buy and sell investments and make money for you.  If they are going to sit on the sidelines with your money in cash and not invest it they can’t make money for you.

 According to the Bank of America Merrill Lynch Fund Manager Survey, 41% of mutual fund portfolio managers were playing in safe by staying in cash.  That’s a safe and conservative position to take when things seem to be falling apart all around you.  But that is not what you are paying them for… especially for any lengthy period of time.

 Some fund managers have stated that they needed the extra cash because so many investors were cashing out of their mutual funds.  That is probably true to a certain extent.  But again these are professional mutual fund managers with a wealth of information and resources available to them to make these types of tough decisions.  So why are they still sitting with hundreds of billions of dollars in cash if, supposedly, the economy and things are beginning to turn around?

 Granted some fund managers have jumped back into the stock market but there is still hesitation with many of them.  Okay I don’t want to appear like I am picking on professional mutual fund managers.  Let me get to the point.

 My point is that even the investing professionals don’t really have a comfortable feeling about this market yet.  Even with all their expertise and resources many are still sitting on the sidelines.  You need to exercise caution with your own investments when you decide to jump back into the market.  Nobody seems to have a crystal ball on what to do.

 What all of this comes down to is if you can sleep at night with what you have done with your investments than that is probably the right thing for you to do.

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