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Four Things I Hate About Mutual Funds

For most Americans, mutual funds are the synapse between them and Wall Street. We use mutual funds to place our bets on the future of the U.S. (and global) stock markets, and our retirement hopes ride on the outcome.

That's a monumental responsibility, and many mutual fund firms and managers strive to meet it, placing paramount importance on the long-term interests of individual investors. We try to praise such funds with columns such as this week's 10 Questions interview .

Unfortunately, plenty of fund firms look out for No. 1 first and foremost in their bid to lure and retain assets. They roll out and relentlessly advertise funds in hot categories that no investor needs, tack on fees that do nothing for investors except lighten their wallet and their managers disregard the fundamentals of investing to chase performance over the short term.

Lots of funds are guilty of this behavior, and it is a great disservice to individuals. Today's column delves into the Four Things I Hate About Mutual Funds. Not all mutual funds engage in lousy, self-serving behavior, but plenty do and investors need to know if their funds are among them. Now that everybody feels safe once again to open up their quarterly performance statements because the market is up, look closer to see how many of the following items your funds are guilty of.

1. High Costs

When choosing a mutual fund, most individuals look first for the one thing that doesn't come with a guarantee: recent performance. What they should look for first is a fund's costs. Great performance may come and go, but costs last forever.

In fact, costs are rising. In 1981, the expense ratio for the average stock fund was 0.97%. Twenty-two years later, the average expense ratio is now 1.6%, according to Morningstar. Add in turnover costs and other expenses -- such as 12b-1 fees, through which you foot the bill for your fund's marketing expenses! -- and the average stock fund runs as high as 3% a year. On top of that, scores of funds carry load fees -- sales charges of up to 5.75% on the front end or back end of a purchase. And costs aren't getting higher because life is getting harder for mutual funds -- these firms, the skippers and their boards still make plenty of money, rest assured.
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