Mutual Funds and Diversification Strategies

by: Larry MacDonald posted on: May 27, 2008    
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Mutual funds have thrived despite a wave of critical studies and books, one of the latest being The Investor's Dilemma (2008) by Louis Lowenstein. In my May 22 column, Are mutual funds a rip-off? I offered some possible explanations why the industry has held up, such as the value-added derived from financial-planning services bundled with mutual funds.

That’s not to necessarily say investors ought to buy mutual funds with high annual management expense ratios (MERs). An alternative is passive, indexing solutions like MoneySense’s Couch Potato approach.

Just spread your savings over several broad-based index funds and/or exchange-traded funds to set up a portfolio that is diversified over stocks, bonds, cash and other assets. The annual MERs are under 0.5% and the time or energy required is practically nothing. Yet, studies show your portfolio will do as well as or better than most people with financial advisers.

But then all those other personal-finance issues remain -- like the best way to minimize taxes, save for retirement, arrange one’s estate, etc. They will require some time and effort to address properly. You can do it yourself, get advice from a knowledgeable friend/relative, or … hire a financial adviser.

This article has 5 comments! Add yours below...
Larry MacDonald

Larry MacDonald

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This article has 5 comments:

  •  
    JCopp
    May 27 08:50 AM
    Why not hire a financial advisor who has figured out that ETF's can work best for both the client and the advisor?
  •  
    chick
    May 28 09:02 AM
    ETF's are a cop out for investors who don't do or won't do their homework.
  •  
    Bear Stocks
    Report
    May 29 05:18 AM
    My Website
    Far from being a cop out, ETFs offer the easiest way to create a diversified portfolio capable of targeting domestic & foreign stock markets as well as non-correlated sectors like energy, metals, agriculture, currencies, etc.
  •  
    Kunst
    May 29 11:54 PM
    In general, I don't have time to do detailed research on individual stocks. I focus on macro/environment trends, then look for ETFs that focus on what I want to invest in. Yes, this gives up some potential gain from more focused investing, but I note that many who pick individual stocks don't do any better than the indexes.
  •  
    Kunst
    May 30 12:02 AM
    I like ETFs better than mutual funds because:
    1) It is easier to get in and out of them.
    2) They generally have lower management fees than mutuals.
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