Critique Your Favorite Fund Columnist

Physician's Money Digest, April15 2004, Volume 11, Issue 7

Wall StreetJournal

We always enjoy reading JonathanClements' columns for their incisiveinformation, but the one he wroteabout mutual funds on Jan. 28, 2004, ispretty far off the mark.

He asserts that mutual funds are stillthe best way for "most investors to be instocks," which is wrong. He's also incorrectwhen he says they offer "low cost,low risk, and a low investment minimum."Warren Buffett, among other successfulmanagers, clearly shows that youdon't, as Clements believes, "need toown hundreds of stocks and bonds forproper diversification."

Poor Choice

First, the overwhelming majority ofstock mutual funds fail to equal, muchless beat, a benchmark index. That hasbeen true since well before World War IIand still holds true today. Thisknowledge can easilylead investors to ploptheir money into indexfunds, which have neverand can never beat theindexes because of managementfees and otherexpenses. Investing in anindex fund is like waking upeach morning and saying, "Ilook forward to anothermediocre day."

Second, a typical stock fundrequires $1000 to $3000 or more for abeginning investment. On the otherhand, there are well over 1000 companiesin which anyone can invest directlyfor far less money (as little as $20 tostart), not to mention avoiding fees andcommissions. Added bonus: There's noneed to deal with the additional investingfactor of either a broker or afund company.

Third, regardless of how muchresearch anyone performs, it'salmost impossible to determinewhat a fund owns at anygiven time or how much buyingand selling they've beendoing. History shows thatstock fund turnover approaches100% a year.

High turnover results inshort-term capital gains, assumingthere are any, along witha ridiculous amount of trading commissions,which can eat into the physician investor'spocketbook.

Better Options

Stock mutual funds are okay if youhave no other choice such as a 401(k) orsimilar retirement plan. But investing inindividual, quality stocks with rising dividendsmakes a lot more sense forinvestors. At the very least, an individualknows what they own.

Where Arethe Customers' Yachts?

If you want to really understand whystock mutual funds don't make sense,read Fred Schwed, Jr's, classic (Fraser PublishingCo; 1985), published first in 1940.Even back then, a few of us knew thereal truth about stock mutual funds.

Bill Staton, CFA, MBA, is chairmanof Staton Financial AdvisorsLLC, a money management firmwhose accounts were up 20%+from 2001 to 2002 and 33.14% in2003. Join his free weekly Dollar-Bill Club and get a no-obligation trial to hisweekly "E-Money Digest" by e-mailing bill@billstaton.com. He welcomes questions or commentsat 704-365-2122 or 704-365-1910 (fax). He andhis wife, Mary Staton, coauthored their newestbook, Worry-Free Family Finances (McGraw-Hill;2003), which is available at www.billstaton.comand through all bookstores.