Many investors will begin to see more disclosed to them as they open their financial statements when mutual funds are involved. It’s hard to not obsess over fees and performance when it comes to investing, but more times than not, this frustration is misplaced.
The Labor Department has been trying to squeeze out the excessive fees charged by mutual funds and increase transparency so consumers have a better idea of what they are investing in. The new regulations have turned a spotlight onto the mutual fund industry, evoking anger out of high fees along with poor performance. However, many of the fees built into a mutual fund still do not show up as a line item on a statement. This seems to be heading down the right track of increased transparency but we are still a ways off from where the industry needs to be. While high fees can eat into an investor’s long-term performance, we must not lose sight of what can have the largest impact on an investment account – disproportionate risk taking.
The main miss-focus investors have when it comes to their investment performance is comparing it to a benchmark as the sole factor for success or failure. As a population we get obsessed with outperforming something that doesn’t impact their retirement goals. We are always chasing after the next big thing and often for all of the wrong reasons. For example, one of the top hedge fund managers during the financial crisis, John Paulson, made 591% for his clients in one of his funds. He was king of the world and he saw massive inflows as investors threw money at him hoping to ride the money trade with John Paulson as the conductor. Except Paulson’s money train all but fall off the tracks as one of his funds fell 51% in 2011.
The main purpose most consumers invest in the capital markets is the potential to have their retirement accounts appreciate so they can have something to live off of during their ‘golden years.’ For many, this entails readdressing the risk they are taking as they get close to retirement. But this is where a disconnect comes in, they spend too much time worrying about how their accounts perform relative to an arbitrary benchmark and lose focus of their actual goal. Many investors acknowledge that benchmarks don’t retire….but we do, and with that must closely monitor the risk we are taking!
In 2008 the S&P 500 had a total return of -37%. For those with the mantra of just putting their assets into an index mutual fund and let it ride, 2008 was a big wake up call. In order to make up a 37% loss, one would require an approximately 50.5% gain just to get back to even. Risk is the name of the game, especially in the tumultuous times as we are currently in. John Paulson took a risk and it paid off with his 500+% gain, but risk popped up its little head again in 2011, cutting many of his partner’s investments in half. Managing risk, attempting to earn steady gains while preventing Paulson-like negative returns is one of the steps to having a happy retirement, not worrying about an inert benchmark that doesn’t have plans to travel and visit grandkids like many of you may have.
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