Mutual Funds Bear's Rebuttal
by Paul Larson ([email protected])

First of all, let's not pick nits about index funds not matching the respective indices. Of course, no index fund is going to be able to perfectly match the index it is trying to mimic, and most funds will perform ever so slightly worse. Some index funds actually get a little lucky and perform better than the index they are tracking. Nevertheless, for the vast majority of the index funds any difference in performance is so minuscule to be statistically irrelevant.

As I expected, the case Rick made for mutual funds pointed out a few exceptions to the rule. This is one of the oldest marketing tricks in the book. Publishers Clearing House, state lotteries, and casinos all absolutely love to take pictures of those who have beaten the odds with their oversized checks and balloons in hand. They plaster whatever they can with these images to give the impression that, yes, you have the possibility of winning, too. But numbers don't lie, and mutual funds, like slot machines and lottery tickets, remain to be exceptionally poor bets.

Concerning a different point Rick made, why bother with international mutual funds when one can get significant overseas exposure through globetrotting companies such as General Electricand Coke? If one really wanted to invest abroad, there are numerous American Depositary Receipts (ADRs) traded on the NYSE that are just as easy to buy and sell as American stocks. Besides, why invest abroad in the first place and then have to worry about political risk and currency fluctuations? If the Asian situation of the past nine months has shown anything, it has shown that these are risks not to be taken lightly.

I'm flattered that you have enough trust in me, Rick, to be willing to invest in the Larson Value Fund should I decide to get Wise down the road. But we've known each other for some time, and our relationship is certainly much closer than almost all fund investors have with their manager. Would you have the same amount of trust in me if all you knew about my investing style came from a handful of tables and graphs?

In short, managed mutual funds take away a great amount of control from the individual investor while at the same time significantly underperforming other financial instruments that have the same amount of risk and are just as easy to buy and sell. Why their popularity continues to soar, frankly, baffles me.

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