Why Mutual Funds Are Extremely High RiskPosted: November 7, 2011
We just received a quarterly statement from the HSBC for one of the few remaining mutual fund accounts we have. This account was opened on October 27th, 1999. It is invested in the HSBC Balanced Fund which is supposed to be very low risk. Any guesses on the return over the past 12 years? .2% (yes, point 2) percent per year. Seriously?!
We’re lucky. We didn’t actually lose money! Although after inflation of even 2% per year we lost about 20%. Most of these bank or credit union sponsored programs work the same way. Actually, so do most life insurance related investment programs. Here’s how it works:
The bank employee is forced to complete the required courses to become a Certified Financial Planner in order to sell mutual funds on behalf of the bank. They usually have zero history or background in securities trading.
They are trained to sell the investor a set of investments as prescribed by the bank through beautiful graphs on their computers showing different levels of risk. Low risk clients are directed to balanced funds. Super low risk are directed to bonds, especially govt. bonds and higher risk are directed to what they like to call equities.
The bank charges a fee to manage these accounts, usually in the 2% range. That’s more than double what the bank would make administering traditional bank accounts, loans, mortgages, etc. The trusted person at branch level has absolutely no control or really any idea of what investments the bank is going to make on their client’s behalf. Thus they have no accountability or even any excuse for the results of these investments. All they can say is stay patient and don’t withdraw your funds! Why do they say don’t withdraw your funds? Because that’s what they are told to say by their employer who is earning 2 percent on every penny regardless of returns.
The worst part is the glossy brochure they sent with our statement labelled “ENCOMPASS…Our Report On The World Of Investments”. Under the headline “Steering your way through market unrest” they list three essential strategies to keep you on track to reach your goals…
1. Stay Invested
2. Keep Investing
3. Diversify Your Holdings
I like the third option. Unfortunately we don’t have enough time for option 1 to work out (we’ll be dead before it returns enough to retire on) and option 2, well, we’ve been trained since childhood that if the stove is hot don’t touch it so…