Why Settle for Mutual Funds?

Many people have been brainwashed into thinking that mutual funds are the best path to wealth. I'll readily agree that owning stocks is the key to doing that. Are mutual funds the very best vehicle, though? I think not. 2021's first quarter was one of the best I've had in 42 years of investing. My totally unlevered IRAs were up 33.23% (not annualized) in the three months. I was able to achieve that through good stock selections, dividends earned and covered call income collected. The three major indexes the S&P 500, Dow and Nasdaq 100, gained 8.09%, 9.74% and 3.43% respectively during Q1 2021. The data below clearly show that it was smaller-cap, value oriented stocks which led the way so far this year. I'm friends with a married couple and help them both with their personal investments. The husband was able to keep his job during the COVID shutdowns while his wife was let go from her job when things were at their worst. Because of her termination, she was able to roll-over her old 401(k) money to an individual IRA account. She then made the very good decision to convert the entire amount into a tax-free Roth IRA. Getting her cash out of the company plan allowed for unlimited choices of investments rather than just the menu of mutual funds her employer provided. It also made the Roth conversion possible. At the end of that process last April there was just over $177,000 available to invest. With my help the account grew by over 148% from April 28, 2020 through March 31. It gained 38.27% in 2021's first quarter alone. At fate would have it, getting fired was the best thing that could have happened to her. Her Roth IRA generated almost two-and-a-half times more money than she would have earned by continuing to go to work over the past 11 months. Plus, there were no commuting expenses, no FICA to pay and all profits are now tax-free forever. Her husband's 401(k), which was 100% invested in pure equity mutual funds, did well by absolute standards. He had gained 27.83% over 52-weeks and 11.00% year-to-date. Financial Planning magazine just published its list of the 15 best non-indexed mutual funds over the past 15-years. There are thousands of funds to pick from, so finding these gems in advance and holding them over the very long-term would have been quite a feat. What was quite noticeable was the horrible returns on the iShares U.S. Aggregate bond exchange-traded fund . It averaged just 4.17% annualized over the entire 15-year period. Note, too, that bonds experienced the largest bull market move in history as ZIRP (zero interest rate policy) took coupon rates to all-time (modern-day) lows. Buying bonds, rather than stocks, in long-term accounts is a suicidal move if you expect to have a comfortable retirement. Target date funds and balanced funds, which blend stock and bond holdings are only slightly better than pure fixed income. Those are popular choices for 401(k) and IRA money by investors who don't really understand market history. I've been keeping good records on my IRA returns since the start of 2012. That only covered 9.25 years, but I'm proud to say my internal rate of return has been 20.78%. Real Money Pro readers won't be surprised to hear that my 52-week trailing rate of return on the combined values of my unlevered IRAs and leveraged margin-type accounts was 196.60% as of March 31. That put me well ahead of all but two of the 15 best mutual funds' trailing 12-month results. If my post-2012 results remain better than all 15 of those fund managers on an annualized basis. I never use borrowed money to buy stocks and thus never pay interest to my brokerage firm. The leverage employed is always achieved via put writing, which generates option income using available free buying power. Socking money into equity mutual funds is far superior to owning CDs, money market funds, bank deposits and bonds. Of those, only US treasury paper would be marginable, allowing for usable buying power to sell puts against. Many of my best returns come from following my own advice by writing puts and/or setting up full buy/write combinations on stocks I favor. Key takeaways: Avoid all fixed income in long-term investment accounts. Short-term results can vary widely. Compounding at 15% or better puts you in the top echelon of all investors. 15% annualized average gains will double your nest-egg in about 4.8 year on a pre-tax basis. If you leave a job... consider rolling over your 401(k) money to a brokerage account where choices are unlimited. Roth IRAs are your best defense against future tax hikes. The benefit of deducting yearly contributions pales in comparison to making gains tax-free over the rest of your life. Converting traditional IRAs to Roth IRAs makes a lot of sense if you have outside money to pay the taxes due on the converted amount.

Why Settle for Mutual Funds?

Here's why I'd steer clear of these funds -- and what to do instead.

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