One of the many great attributes of my family is that the vast majority of the time we do not take ourselves too seriously individually or as a family. Life is too short, isn’t it?Look at how we choose our bottles of wine. So sophisticated…. NOT! If the artwork on the label is cool, or the name of the vintner, or the title of the wine draws us in…we’re there. When we discovered a 2007 Pinot Noir called O’Reilly’s with a beautiful drawing of an Irish Wolfhound silhouette – we would have bought every bottle made if we could. See the O’Reilly’s Pinot Noir label here.Another example of our sophistication (ha,ha) – is when we’re at Del Mar gambling on the horses – if you call $5 a pop gambling! We're just there for the atmosphere. It’s all about the name of the horse – that’s how we place our bets. We have so much fun with that. Irish names usually do it for us. “Shamrock surprise”, “Celtic Lady” would each be a great horse for us to pick! (Yes, we do win occasionally!)What really is surprising, once you know more about it – is the game of naming mutual funds. A large part of the time it’s purely marketing strategy - how can we name and market our fund so that it's not one of the 20% that will go belly up in the next couple years? Or better yet, attract a lot of investors? We’re talking about investing our hard earned money – really – you’re going to market us as we make the important decision of where to invest? When did the financial services industry get so far removed from serving honestly and faithfully? When did they get away from helping each customer reach a better life?When it comes to mutual fund names, and when you’re in my business and you review 401(k) plans, you see it all. An example is a fund that has “growth” in its name. Sounds good – one is certainly hoping for growth! But if it means that the fund is oriented to “growth” stocks, this fund is likely to have a lower return. That’s because most of time value stocks (higher book-to-market ratio) outperform growth stocks (lower book-to-market ratio).One of the most “sinister” of all funds, found in almost every 401(k) plan is the “Stable Value Fund”. Sounds good – when things are crazy and the market is going through wild swings – a little “stability” sounds very enticing. However, to access the long term inflation-beating results of the stock market you MUST live through the swings of the market. If you want to go swimming, you must get wet. I call Stable Value Funds evil because they effectively keep account owners isolated from the market. This is against the basic idea of a 401(k) plan – unless you are 65 or older – and even then you still need some funds in the stock market. They use people's own fear to enrich themselves and give the fund buyer a lesser quality retirement. That's just plain awful.For those who constitution makes them fearful of the market’s swings – Stable Value Funds are more than just enticing – they’re irresistible like alcohol to an alcoholic. And sure enough there are billions of dollars in these funds, because many people are understandably frightened of the market.If you’re 65 or older and still working at a company with a 401k, it’s not too far-fetched to place some funds in a Stable Value fund, However most using 401(k) plans are age 20-55. They need to outpace inflation and build wealth – not barely keep up with inflation.Finally, often Stable Value Funds are "proprietary" meaning that same company that provides the 401(k) plan is making money on the funds - this is a conflict of interest - not illegal - but a poor practice.There are also funds that have names that mislead you on their strategy or try to make it sound exciting. The Strategy Fund. The Enterprise Fund. The Opportunity Fund. Pure marketing. It’s like a box of chocolates – you never know what you’re going to find inside.While we’re talking about mutual funds it’s important to note that the rules governing them are very loose. Even once you read the prospectus – suppose they claim to invest in large US stocks. Yet they are allowed to invest up to 20% of the assets anywhere they wish.Let's switch to hedge funds for a moment – not the same class as mutual funds – they managed to get the SEC to approve a much looser set of rules. Hedge funds are essentially a place where those that qualify to own them, often lose money quickly. Hedge funds have been notoriously poor performers, but hedge fund rules do not have rigorous reporting requirements. Yet the financial press make them sound exciting and desirable. They are essentially a status symbol where the “wealthy” lose money.Back to mutual funds. Not only do they not have to invest 100% in what they claim to be, they will change within that very loose restriction as much as they wish – we call that “drift”.Bottom line, for the vast majority of mutual funds, you cannot count on “who they are”, “what they will become” and “how often they will change personalities”.That’s just the beginning – I haven’t addressed their internal expenses, cash levels, low number of holdings and their turnover rates.Mutual funds are important because funds that do it right give their shareholders low cost and deep (high diversification) exposure to asset classes.We use institutional funds that are precise, low cost, and have no drift. We can count on them being exactly who they say they will be now and into the future. Other positive attributes are low cash levels and low turnover – and a high number of holdings (diversification). Finally the DFA fund family we employ takes advantage of the known persistent global market premiums: small beats large, value beats growth, and more profitable beats less profitable. We’re one of about 30 independent firms in SD County that have access to DFA. Only large institutions or independent RIA firms like O’Reilly Wealth Advisors, who qualify and are approved, can get access to DFA. The general public and the mainstream financial services industry cannot get access to DFA.
