Difference between an expensive toothbrush and mutual fund

by Manshu on July 24, 2009

in Opinion

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Last week I bought a battery operated toothbrush by mistake. It is not one of those fancy ones and it costs just a little more than the regular ones. I don’t have anything against battery operated toothbrushes, just that I didn’t want to keep something inside my mouth and then power it on.

When I discovered it was battery powered, I was not too dejected because I can always use it without powering it on. Regardless, I have used it with the power on, and like it quite a bit. A higher price meant slightly higher quality.

Sometime during the last week, my laptop charger gave way and I had to get a new one. I went to Best Buy with my existing charger and asked them if they have the same one or not. They told me they didn’t have the same thing, but they had one that will work with my laptop, but it cost a little more, as it was a universal charger. I asked them if I could return it if it didn’t work with my laptop, and they said I could. I went back home and it worked wonderfully well.

Most of the times when you are buying anything you have a fairly good idea of what to expect from it and the price is usually directly proportional to the quality.

Financial products of all shapes and sizes are different from everything else in this respect. But I find this true for mutual funds more than anything else.

There is no evidence that mutual funds with higher charges are any better than the lower ones. If anything, it is the other way round. There is no clear reason why one mutual fund charges a higher fee than another. The other thing about mutual funds is that if you are not buying a vanilla index fund, you can’t be sure what you will end up owning.

I was surprised to learn that an Infrastructure mutual fund that my uncle owned had a bank as its biggest holding. Over 10% of the mutual fund’s assets were invested in a single bank. According to them, banks provide finance to infrastructure companies, which is an important part of the whole infrastructure story so it is fine for them to own banks.

If I buy an infrastructure fund to own a bank stock, what should I do to own a steel company?

I bought USO – the oil ETF because oil had crashed and USO seemed to be a good proxy for oil, but I was totally wrong. USO has to roll over its contracts every month and they are being played by traders because of that. It turns out it is not a good proxy at all.

Then there are funds like the 3X housing ETFs and 3X daily leverage ETFs, both of which sound similar but act very differently.

Why does this difference exist between financial products and other stuff, and what do you think we can do to simplify financial products, so that they become easy to understand and own?

{ 3 comments… read them below or add one }

Mark Wolfinger July 24, 2009 at 10:08 am

Hi,
1) You can do NOTHING to simplify products. They are complex and confusing for a reason. So that buyers cannot understand what they are buying. If they did understand, they would not buy.

2) Those 3X (2X also) ETFs are NOT what they look like. It’s financial suicide to buy those. They are constructed to move towards zero as time passes. They are for day traders – investors beware. Much better to buy the ‘regular’ 1X, despite commissions.

3) USO is another of those ‘buyer beware’ products

Wall St is filled with people who want to take our money. Fees, commissions, more fees and then provide no useful guidance.

I’m not really doom and gloom, but so much is just unfair for the retail investor. Things should not be that way.

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Manshu July 24, 2009 at 4:40 pm

Yeah I agree Mark, things are becoming more and more complicated without adding any value. I think the new 130/30 ETF is another example of the same thing.

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jason July 24, 2009 at 5:13 pm

Mutual funds are out there to make money. Just like every other business. Some charge more, some charge less, when it comes to fees. It is same as if buying a toothbrush at Wal-Mart, Target, K-Mart, CVS, etc. Some charge you more some charge you less, it is up to you to figure out what you want to pay for it…

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