When Are Your Funds Average Returns Good Enough?

This month’s column by James B. Stewart in SmartMoney magazine is about “enhanced mutual funds”; ones that have avowed to beat the market. They are index funds of their own making, rather than ones that follow a certain index. That sounds like regular old investing to me, doesn’t it? Don’t we all want to beat the market?

He says in the column about regular index funds:

“Their whole point is to be ‘average’, nothing more and nothing less” and I could not agree more.

But then he goes on to explain why he was moving some of his money into this enhanced funds in order to chase higher returns, and while I can understand his motivation, the whole point of mutual funds is to set it and forget it, to guide those that do not know or do not want to know that much about the market but want to make decent returns over the long term. We pay fund managers a small fee (at least I hope you do) to manage our money and try to make it grow. Most people should be happy with ‘average” returns..if you put away enough, these average returns will pay off handsomely. Moving money into “enhanced” funds takes on a lot more risk, and should not be done by those not comfortable with this increased risk. I for one invest in two different ways…mutual funds and individual stocks (all separate from our retirement money which is also in funds). If i want to take risks, I buy individual stocks that I have chosen. If I want the sure thing (hopefully) over the long term, I trust fund managers to make those decisions for me. That’s why they do what they do and I do what I do.

To me, enhanced mutual funds remove the very basics of mutual funds by increasing your risk to volatility, and for me, I will stick with my “average” mutual funds.

Thoughts? Comments? What do you think of “enhanced” mutual funds? The article right now is in print only, but I am sure it will be up online sooner rather than later, so check out the magazine if you have access to it.

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