Dividend Education

5 Reasons Mutual Funds Might Not Be Right For You

5 Reasons Not MFunds_LI

Mutual funds are an investment strategy that pools your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own. While mutual funds are right for some investors, they don’t work for everyone. Here’s five reasons why.


Diversification is a great way to manage risk. But, owning several mutual funds may not lower risk as you can duplicate stocks and sector concentrations as you add more funds. Plus, if you have several mutual funds, each with 100+ individual stocks, it’s difficult to track holdings and determine your actual diversification and risk.


Mutual fund portfolio managers have thousands of shareholders for each fund they manage and don’t communicate with each shareholder on a regular basis. When changes occur in fund strategy or securities are bought and sold, you’re typically not made aware of these changes.


In order to meet your goals, it’s critical that your investments are aligned with your specific objectives. Mutual funds have a strategy, style and portfolio allocations that meet the fund’s objectives, not yours. Time horizon, cash flow needs and growth expectations, etc. all play a critical role that your investments should address.


Mutual fund profits are subject to capital gains taxes which are distributed to individual fund shareholders. For this reason, you could end up paying taxes on gains even though you didn’t sell any shares or when the overall fund incurs a loss. It’s important to avoid unneccessary taxes so consider a custom investing approach instead.


Inside mutual funds are complex fees and expenses that can significantly impact your overall returns. Even “no-load” funds can charge management and other fees which are not transparent to investors. Hidden fees have a big impact on your portfolio over time so it’s important to know what charges and fees are in the fine print.

Personalized Money Management

Mutual funds can be ideal for smaller portfolios but for high-net worth investors, a separately managed portfolio can better meet your specific needs that also addresses your individual tax needs. Consider a personalized money management approach which has several advantages over mutual funds.

The Safety of Dividend Stocks

Dividend stocks have historically provided lower overall volatility and stronger downside protection when markets decline. Since 1927, dividend stocks have consistently held up better than the broader market during downturns. You can measure downside risk through a statistic known as downside capture ratio.  Downside capture ratio is a statistical measure of overall performance in a down stock market. An investment category, or investment manager, who has a down-market ratio less than 100 has outperformed the index during a falling stock market.  For example, a down-market capture ratio of 80 indicates that the  portfolio measure declined only 80% as much as the index during the period. The downside capture ratio of high-dividend-yielding stocks, since 1927, has been 81% or lower over various long-term periods (table 1.2).  Put a better way, during months that the S&P 500 stock index fell, dividend stocks declined by nearly 19% less than the broader market.

The Snowball Effect

thumbnail_Snowball - 02 CoverThe Snowball Effect is an income investing book that shows how to achieve retirement goals by investing in blue-chip dividend paying stocks, high-yield bonds, and writing covered calls. It is the fourth book by well known investment author Timothy McIntosh, a value portfolio manager for twenty years.

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