April 10, 1998
Many of my friends and colleagues, myself included, are at a stage of life and career where we have crossed over the white lines, from the slow lane to the fast lane. I don't know what that means, but it is reflected in our preoccupations with new games to play.
We now have had families and jobs for quite awhile, and mortgages, too. Those were interesting new developments when they occurred, and they kept us fascinated for a long time. ("Hey! Check it out! I've got a wife!" "You think that's cool? Look at me, I live in a house!") We've been through several stages of financial restructuring, obtaining credit cards, buying stuff, cutting up credit cards, getting new credit cards, getting raises, spending raises, paying taxes, complaining about taxes. All of this was entirely alien to us when we were in high school and college, and for a time it was fun, too, like a giant game of Monopoly, or Life (the early part of the board, that is).
Now, however, we are beginning to move on to another new stage. We've managed to make a little money beyond our expenses. We've got a little IRA retirement account, too. We've got kids who actually look like they might grow up someday, which implies they might need to go to college, which rumors suggest may cost a fair amount of money. We've even bought "life insurance," which still somehow seems like the biggest waste of money imagineable, but that's only because we haven't died yet. We are entering the middle stages of the Life board.
The really fun new game we're now playing is called "Investing". In the game of Life, this is represented (as I recall) by a number board, on which you place some money before another player spins the wheel. If the number you spin comes up, you win double your money, or something like that. It's basically gambling, of course, to the average investor, even though it is also the engine that drives the growth of the entire capitalist world, which is kind of weird when you think about it: the global economy dependent upon the compulsive decisions of people to whom stocks and bonds are essentially equivalent to Lottery scratch cards.
But lately, the U.S. stock market has been growing so inexorably that the gambling element is virtually eliminated from investments, especially in the public mind. The only question is which stocks to buy, whether mine will go up further and faster than yours, not whether there's any realistic chance that I might lose some money, especially over the long run. Of course, this mentality is self-reinforcing, which is why so many professional market forecasters have been wrong repeatedly in recent years when they've predicted a Bear market following months of runups in stock values. Sure, the P/E ratios don't justify further growth; sure Asia's meltdown will hurt U.S. profits; sure, there will be a downturn, a leveling-off, a cooling period. Oops! The Dow just jacked up another 100 points!
It's because so many of us have been having so much fun playing the game, we keep encouraging more and more of our friends and relatives to come on in and join us. They bring in new money, from their IRA's, their savings accounts, their college funds, whatever, and the market just loves them, and the increase simply draws in more stragglers. I suppose if the Crash is coming, sometime around the millenium, let's say, it'll be when we all finally run out of new money to invest, and some Apocalyptic paranoia starts scaring out the truly marginal players, who then begin a reverse cycle of disinvestment, decline, and further fear. That gives us another year or so to keep riding the gains, before we should all pull out and let the other suckers bear the losses. Or maybe not.
Anyway, I wanted to talk about Mutual Funds. Be honest, now: when did you first learn what a "mutual fund" was? My guess is, most of us learned sometime around the age of 30. These days, young people are learning about mutual funds at earlier ages, mostly because awareness of the stock market has spread more widely along with the persistent growth in values. But when we were, say, 23 or 24 years old, unless we had the misfortune to go to Business School or study Finance in college, the term "mutual fund" was as alien to us as "portfolio," "assets," and "equity".
Seriously, if you had asked the average mid-20's aspiring Yuppie to define those terms ten to fifteen years ago, you'd have gotten answers like:
- "Things being equal or the same for everyone."
"What about equity in a financial sense?"
"Um, everybody having the same amount of money?"
- "Good qualities, like being handsome, or nice, or strong."
"And in a financial context?"
"Um, having lots of money? Being generous?"
- "That's easy, a collection of your drawings."
"In financial circles?"
"Um, a wallet?"
- Mutual Fund:
- "Would that be where everybody chips in for the pizza?"
Now, of course, we're fully versed in the lexicon of financial markets, and we engage, with straight faces, in absurd conversations that include all of the above terms, along with many others like "leverage" and "no-load" and "short-term capital gains". It is very little different from when we used to play House or Army, and we imitated the language we learned from TV shows. But, let's be honest: we really have very little clue what we're talking about. And, more to the point, we don't want to know.
Don't believe me? Okay, in how many mutual funds do you currently own shares? Half a dozen? That means you receive at least 20 to 25 significantly sized pieces of mail related to these investments per year: Annual Reports, Prospectuses, Semi-Annual Reports, as well as various insider Newsletters and other documents. Have you ever read any of these? I didn't think so. But you keep them around, don't you, in a file or a folder or a box somewhere? After all, when you first bought into the fund, didn't it say all over the application forms, not to mention the advertising: "Investors should thoroughly read the Prospectus before investing"? So you keep them around, because, obviously, there must be some important information in there, and you're planning to read it some day, aren't you?
Okay, so, today I will provide another service, free of charge, to all of my faithful reader. I will help you to understand what is in the Prospectus of a typical Mutual Fund, so that you can lay to rest your hidden inner fear that, somewhere on page 63, it says ". . . and we can confiscate your car and your firstborn child upon presentation of Form 1301.3, if you have not adequately refinanced your leveraged sub-account with recycled liquid assets within 3 years of obtaining a rollover capital gain exemption certification." Calm yourself: it doesn't say that.
What the Prospectus does say is essentially the following (I'm paraphrasing here):
- Minimum Investment: We would like your money, but we're in the big time, so no less than $1,000 a whack, if you don't mind;
- Financial History: Look how much money we've made over the past few years: not too shabby, eh?
- Fund Objectives: Our various funds have different "objectives," so you should pick the one that matches your goals. The objective of the "Growth and Income" Fund, for example, is simply to make lots of money. The objective of the "Value" fund, however, is to make gobs of money. As for the Small Cap Contrarian Emerging Markets Capital Appreciation Fund, the objective is to make shitloads of money. Choose your investments accordingly.
- Investment Policies and Practices: We will do whatever we damn well please with your money.
- Risk Factors and Special Considerations: This is the part that you're supposed to read really closely, so they make it especially convoluted. It says things like: "Non-publicly traded securities may involve a high degree of business and financial risk, and a Fund may take longer to liquidate these positions, and although these securities may be resold in privately negotiated transactions, the prices realized on such sales could be less than those originally paid by the Fund..."
Translation: "Look, we might screw up, okay?! You might lose your shirt! Get used to it! We're only human, for God's sake! Give us a break, it's not like we're trying to trash your kid's college education, you know; we've got a lot of money in this stupid fund, too!" Or something along those lines.
- Management of the Funds: These are the dudes who will get to play with your money. If you had made smarter decisions in your life, you could be doing what they're doing, and making a lot more bucks than the measley pittance you're giving them to fool around with.
- Dividends, Distributions, and Taxes: Believe it or not, we will actually pay you a little bit of money back for the large amounts you give to us. You might have to pay taxes on this, but that's your problem.
- How to Open an Account: Call your friend the investment advisor and let him deal with it.
That's about it. You see, you had nothing to worry about. Are you making money on your investments? Of course you are. At least, it seems that way, because the numbers keep going up on the reports you get in the mail, but of course, you're not really getting anything out of it, like a better stereo system or a new car, or even a quality meal at a fancy restaurant. That's because that money represents your "assets"; it's "equity" in your "portfolio". If you want a new stereo, you'd have to "liquidate" it, and probably pay taxes, which would be really stupid, according to your friend the investment advisor, since the market's growing, and you should be saving for the "future". I guess it really is like a game, complete with play money. At least we're all having lots of fun, aren't we?
© 1998 David N. Townsend
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