Having cast a palpable cloud of gloom on this industry, it is important to note that mutual funds do offer some advantages and have their role for specific purposes. For example, if an investor feels that he or she ought to have an investment in foreign stocks but is unable to follow individual foreign securities, then an international mutual fund might make sense for a portion of his money. Likewise, if an investor is looking to place a portion of his money in so-called “emerging growth stocks,” mutual funds offer a way to obtain a diversified list of these stocks without spending inordinate time and effort analyzing small companies. Such analysis is demanding work, even for professionals.
In addition to the international and emerging growth funds, there are other “special situation” funds which help achieve specific investment objectives. For example, some mutual fund families offer special industry funds for those who want to have a certain percentage of their money in, say, energy stocks, but cannot find the right stocks. If such an investor does not have enough money to be diversified, then an energy mutual fund might make sense. But, again, it is usually wiser to buy the Atlantic Richfield’s and the Exxon’s of this world than a widely diversified energy fund, particularly when investing for the long run.
There is still another important reason to own mutual funds. For the very small investor who wants to dollar average into the market with a small amount of money, funds offer a very convenient way of periodically investing less capital into the market on a dollar-averaging basis.
In the final analysis, however, the argument for and against buying into mutual funds betrays a deeper confusion among investors, many of whom categorically refuse to trust themselves, believing instead that the big fund managers are omniscient. In fact, fund results should lead one to the opposite conclusion. Fund managers are human beings and are subject to the same mistakes as others in the investment of money. It is my observation that people, generally, do not trust their own instincts or their ability to choose individual stocks themselves; if they did, they would be much better off. It is always easier to hand off or to defer to someone who is perceived to have more experience. But, like anything else, the more time one devotes to studying the market, the better he will perform—always. This is as true in the investment world as it is in any business. One should not assume that the manager of a mutual fund is a variation of a genius.