Why Mutual Funds Can Be Bad For Retirement

For most of you who are in or near retirement, there is one type of investment you own or have owned, and that is a mutual fund.  Mutual funds have been great investment vehicles as you have accumulated your money for retirement, however, if you are not careful, they can be bad for retirement.  We will explain why mutual funds can be potentially harmful to your retirement plan and what alternatives there are.

To understand first why you have a mutual fund, you must understand how they became to existence.  As more and more Baby Boomers wanted to invest in the stock market, they also wanted to be more diversified.  It was hard to be diversified when you only have enough money to invest in a few stocks.  That is where mutual funds came in, for you as a saver for retirement could buy hundreds and thousands of stocks through a mutual fund.  You were now diversified without having to put too much money in.  This is great to help you accumulate, but not so great when you are in retirement.

There are multiple issues.  First, mutual funds are typically made for the large population.  Now that you have accumulated large amounts of money, you should get more preferential treatment with your money.  By investing in a mutual fund, you own the same funds that your Grand kids have if they own the same mutual fund.  That means the mutual fund isn’t investing based on your retirement needs, but instead the mutual funds need.  If you are supposed to be less risky, how can that be done if everyone can buy the fund?

Just because you have a mutual fund, that doesn’t mean you are diversified.  Mutual funds are invested based on the types of fund they are.  For example, a large cap fund buys only large cap stocks.  That doesn’t mean you are diversified in multiple sectors or different fund classes, like a small cap or mid cap stocks.  This can give you a false sense of security where you think you are diversified, however, you really are only diversified of stocks in that type of fund.  What is the potential issue?  Well if you own a tech mutual fund, and tech stocks go down, so will your mutual fund.  It may not go down as much as a single stock, however, mutual funds trend with the sector that it is in.

Why should you care?  Well if you are in retirement, you may feel like you are safe when you have mutual funds.  The trouble is more when the mutual fund goes down.  Mutual funds do not plan for risk like you would with your own money for retirement.  Mutual funds plan that you will buy the fund and hold on to it forever.  In reality, when you are in retirement, more than likely you will need to use this money for income at some point. 

What should you do?  If you do plan to own mutual funds in retirement, your investments should line up with your overall retirement plan.  You need to understand you risk associated with your mutual fund. Understand that your mutual fund will not go to safety as far as cash or bonds when the markets become volatile.   One of the better things to do is to have an actively managed account based on the risk, not the returns.  The risk is what will separate you from your money.  By being active enough with the risk, you should be able to avoid the major downturns in the market.

One way to become active is to use a portfolio monitoring tool, like WealthGuard.  That is a tool we use to help from the major corrections.  Otherwise, you can always check your portfolio every week.  Mutual funds won’t destroy your retirement, but it is clear that they could potentially hurt your portfolio if you aren’t being careful.  Make sure you have your retirement plan coordinate with your investment plan and know when to make moves if things get bad.

Transcription

Hi everyone, Vince Oldre, certified financial planner. And I want to talk to you why mutual funds can be bad for your retirement. Now not all mutual funds are bad. But some could be bad for your retirement. And before we understand why they might be bad, we also have to understand how mutual funds became in existence to begin with. Now mutual funds started because people like you wanted to invest in the market, but you didn’t have a lot of money to be diversified. So if you only had $100 to invest every single month, it was pretty hard to diversify amongst thousands of different stocks. And that’s where the mutual fund was giving you the ability to do that.Hi everyone, Vince Oldre, certified financial planner. And I want to talk to you why mutual funds can be bad for your retirement. Now not all mutual funds are bad. But some could be bad for your retirement. And before we understand why they might be bad, we also have to understand how mutual funds became in existence to begin with. Now mutual funds started because people like you wanted to invest in the market, but you didn’t have a lot of money to be diversified. So if you only had $100 to invest every single month, it was pretty hard to diversify amongst thousands of different stocks. And that’s where the mutual fund was giving you the ability to do that. Now that you have accumulated a lot of money and you’re going into a distribution phase where you need to take income that same mutual fund might not be the best thing for you in retirement. Now some of you might be in a target date retirement fund or something similar, but it’s important to understand what the correlation might be amongst all your mutual funds and the target date fund that you might have. And the reason why you want to understand the correlation and the risks that you have is to understand what will happen in the next stock market crash or the next economy crash. So you might not be diversified as much as you think, because one mutual fund over here might own the same stock in this mutual fund over here. And that’s why you might not be as diversified so you might have a false sense of security about your diversification. So why should you care? Well, think about this, if I own Apple stock over here, and this mutual fund owns Apple stock over here, and Apple goes down, well that means both of your mutual funds are going to go down. So that’s why it’s important that you look at the correlation with your mutual funds but also correlate it with your overall retirement plan. You have now maybe 100, 200, maybe a million, two million, three million, ten million dollars saved and you should be investing differently than the person that only has $100 a month.  And that’s why these mutual funds aren’t always best for your overall retirement plan. And that’s why what we recommend is using a portfolio that’s going to work with your retirement plan, the portfolio should be designed around you and your goals and your needs and your risk and your income. That’s what should revolve around. But when you buy a mutual fund, it just revolve around that company. They’re not going to revolve the mutual fund around you.  The other thing that we recommend is having a monitoring tool that can help protect or help watch your assets. So that way if there is a market crash, you will be alerted based on how much you’ve gone down. And that’s why we use a tool called Wealth Guard to do that. Now, we can set up Wealth Guard for you, there’s no cost, there’s no obligation. All you have to do is come in and visit with us and we’ll set up Wealth Guard for you so you can be looked after right away. So that’s how we help our clients but what I say to everybody is if you don’t use Wealth Guard, find some other tool that will help you or help monitor your own assets. But as you can see, mutual funds, they can be bad for your retirement, they’re not bad for everybody, but they can be bad for your retirement if you’re not careful and not knowing what to look for.  I appreciate you watching here today and I look forward to seeing you next time.

Why Mutual Funds Can Be Bad For Retirement
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