New Risks in Retirement: Mutual Funds Are Not Delivering the Solution

by | Dec 24, 2015 | Personal Finance 101 | 0 comments

We will take a look at the many hidden risks involved in mutual fund investing. Mutual funds aren’t as reliable as investors once thought.

Unfortunately, many Americans are under the mistaken impression that mutual funds are one of the safest investment options. However, though mutual funds provide Wall Street banks and public corporations with much needed capital, they are more risky than most investors think. Many people have invested in a mutual fund either through their 401k or through private investment packages. However, most people don’t realize that mutual funds are:

  • Extremely speculative,
  • Offer very little risk management,
  • Offer no investor protection, and
  • Have no structural guarantees

How Could this Be?

There are many risks that investors take when they invest in mutual funds.

Do you really understand what you’re investing in? To many, mutual funds seem like an easy investment because it seems like all the work is done for you. The mutual fund manager researches the company and spreads your investment money out so that all your eggs aren’t in one basket.

However, (more often than not), if you’re like most investors, you have no idea what you’re actually investing in. This then causes you to have an unnatural codependent relationship with your financial institution.

For example, a given 401k plan will offer employees upwards of 30 different complex investment plan choices, followed by 20 or more pages of legal disclosures and fine print. Once the average employee has finally made a choice, does he really know much about the plan he’s chosen, other than the plan’s name and some basic facts?

Mutual funds cannot guarantee investors a steady income stream for life. People are living much longer than they were many years ago. One member of the average couple has a 50% chance of living to 88 years old, a 25% chance of living to 97 years old and a 10% chance of living to 103 years old. With mutual funds there is longevity risk. If you or your spouse lives too long, you will run out of money.

Who’s really looking out for your investment? Mutual funds carry with them a risk called moral hazard. Moral hazard is when one party suffers a great financial loss, while the people responsible for the loss suffer no penalties. For example, during the Lehman Brothers collapse in 2008, investors lost all of their money. However the mutual fund companies that managed the mutual funds and encouraged people to invest in the funds suffered no losses, because they were managing other people’s money and none of their own.

Similar to moral hazard risk is asymmetric risk. Asymmetric risk is when one person or entity involved has more information than the other people involved in the trade. For example, most investment banks have more information about a shaky company’s history and financial health than the mutual fund manager will during the initial public offering, (IPO). Because of this, Wall Street insiders and investment banks will have numerous advantages over your mutual fund manager.

What shaky deals, biased speculation, consumer safeguards and lack of regulation can mean for your investments.

When you’re planning for retirement, you want to make low risk decisions that will lead to reliable, long-term income. The more we learn about mutual funds, the more we realize that mutual funds don’t offer these things.


Somehow all your eggs are still in one basket. You could lose your entire principle risk when you invest in a mutual fund. For example:

  • Between 2010 and 2015, pension fund, mutual fund and 401k investors invested $1.4 billion into the oil and gas industries which have taken a significant dive; yet the mutual funds themselves have suffered very little loss, while the investors have.
  • In the financial crisis of 2007, retail investors lost trillions of dollars in what they thought were conservative mutual fund investments. However, mutual fund managers had invested in many subprime real estate investments that imploded shortly after the financial crisis hit.

What about bonds? Unfortunately, mutual funds full of bonds are often just as risky as those that feature stocks. Interest rates can change, bonds can collapse or corporations can default on them. For example, many mutual fund managers invested in foreign bonds like:

Municipal bonds filled with shaky debt from Puerto Rico. UBS investors purchased over $10 billion worth of these bonds and now shoulder $11.4 billion, (or 15%), of the islands $72 billion national debt.

  • The corrupt and double-dealing Chinese real estate company, Kaisa, whose stock fell 55%. Because of this, Fidelity and Black Rock investors must now accept returns of 55 cents on the dollar; and
  • Ukranian bonds that collapsed causing Franklin Templeton Global Bond and Global Total Return investors to suffer a value loss of $3 billion.

Lastly, most of what you read about mutual fund investing and investing in general is full of extensive media, (and personal), bias. Because we have 24/7 access to media and personal opinion from varied sources through our tablets, smartphones, web connections, TVs and newspapers; we have amateur forecasters, pundits and experts alike telling us which investments are hot and which are not.

Though many advisers do advocate the asset management/industrial-complex trading strategy; most of what they’re saying is hype based on little or no fact; designed to get you to read the publication.

Predictions often change more frequently than a new Kardashian story can hit the cover of your local grocery store tabloids, because they rarely hold any financial value. Most forecasts you read are rarely good for a few hours, much less an entire week or several years.

At Teton Pines Financial, we want mutual fund investors to understand that:

  • There are still no industry standards for the proper way to allocate funds in mutual funds;
  • Mutual funds are still deeply tied to Wall Street speculation, unlike other investments like small business and real estate;
  • Mutual funds offer no protection from inflation because mutual fund managers constantly stretch assets to the limits to maintain the highest ROI;
  • Taking your money out of mutual funds is risky, and even the Systematic Withdrawal Plan, (SWP), isn’t working for most; and
  • Consumer safeguards like 0% interest continues to be bad news for mutual fund investors. They cause mutual fund managers and investors alike to seek out highly-speculative stocks to find guarantees of yield. However, we all know that speculative stocks are rarely worth the investment.

Contact us at Teton Pines Financial today. We all know that we must invest for our retirement. And many of us want options that are wise and conservative. For these reasons and many more, Americans should start asking themselves if mutual funds are really a good investment.  Let us show you what options are truly available to you.