The truth about mutual funds

Investors earn returns over time that are far lower than those quoted by mutual fund firms.

In fact, it’s not even a close race.”

This is the conclusion of DALBAR, Inc., the well-respected independent investment research firm.1

For the past 20 years ending December 31, 2009, “the average equity investor managed to eke out an annualized return that outpaced inflation.”  The average return was 3.17% per yearjust slightly more than the inflation rate for that period!

Asset allocation and fixed income investors weren’t so lucky (if you can call that “luck”); they lost ground after adjusting for inflation.

Why most investors don’t come close to getting the returns touted in mutual fund prospectuses…

There are plenty of reasons for this.  For starters…

Investor Trap #1:  “Investors are impatient and irrational,” and “consistently make buy and sell decisions at the worst possible moments,” according to DALBAR, a finding backed up by many experts in the emerging field of behavioral finance.

Investor Trap #2:  You could get a 25% “average annual return” for years and still not make a single dime or even lose money!

Investor Trap #3:  If you’re investing in mutual funds inside a 401(k) plan, fees can “eat up to half your income over a 30-year span,” according to an exposé on 60 Minutes.

In addition, most people aren’t aware that employers are making risky decisions on how to invest your money in your 401(k) for you without your knowledge or approval!  And they are automatically moving your money into higher-fee funds, too.

This is all courtesy of the Pension Protection Act of 2006.  Makes you wonder who they’re trying to protect!

Investor Trap #4:  Taxes, taxes and more taxes!

Nothing I’ve talked about so far takes into account the wealth-destroying effect of taxes.

If you’re like most Americans, much of your savings is in tax-deferred accounts, like 401(k)’s.  Paying taxes later is one of the big appeals of these plans.

But what direction do you think tax rates will go over the long term?  If, like most people, you think taxes are going to go up, and you’re successful in growing a nest-egg, you’re only going to pay higher taxes on a larger number!

The bottom line is that most people’s financial future rests on a game whose rules they do not understand and have no control over.  No wonder most Americans have no confidence they’ll be able to reach their financial goals and dreams.

Which is why a life savings account should be a part of almost everyone’s financial foundation.

A plan that goes in only one direction:  UP.  Both your principal and gains are locked in.

You can take that income without tax consequences, if you do it right, under current tax law.

You can also use your cash value in the policy to inject needed capital into a business or to help you get through tough times.

There’s no cost or obligation to receive an Analysis that will show you how a program custom tailored to your unique situation could improve your financial picture and help you turn your back on the stomach-churning twists and turns of traditional investments.

1 DALBAR 2010 Quantitative Analysis of Investor Behavior