lose all your investment in a fund unless every single security owned by that fund simultaneously becomes worthless — an extraordinarily unlikely event.
You may be interested to know that the specific stocks and/or bonds that a mutual fund buys are held by a custodian — a separate organization or affiliate of the fund company. The employment of a custodian ensures that the fund management company can’t embezzle your money (like the infamous crook Bernie Madoff did) or use assets from a better-performing fund to subsidize a poor performer.
Funds save you from sales sharks
The better no-load (commission-free) fund companies discussed in this book generally don’t push specific products. Their toll-free telephone lines are staffed with knowledgeable people who earn salaries, not commissions, and their websites enable you to quickly find needed information on your own if you so choose. Sure, these fund companies and their employees want you to invest with their company, but the size of their next paycheck doesn’t depend on how much they persuade you to buy or trade.
You have convenient access to your money
The best fund companies are set up for people who don’t like to waste time going to a local branch office and waiting in line. I don’t know about you, but I enjoy waiting in lines, especially in places like a bank, about as much as I enjoy having my dentist fill a cavity.
With mutual funds, you can make your initial investment from the comfort of your living room by completing a simple application form (including in most cases online) and either sending money electronically to fund your fund account (see Chapter 16 for details) or by writing and mailing a check. Later, you can add to your investment by mailing in a check or by authorizing money transfers by phone or online from one mutual fund account to another.
Selling shares of your mutual fund for cash is usually easy. Generally, all you need to do is call the fund company’s toll-free number or click your computer mouse at your investment firm’s website 24/7. Some companies even have representatives available by phone 24 hours a day, 365 days a year. (Signature guarantees, although much less common, are still sometimes required by fund companies.)
Many fund companies also allow you to wire money back and forth from your local bank account, allowing you to access your money almost as quickly through a money market fund as through your local bank. (As I discuss in Chapter 11, you probably need to keep a local bank checking account to write smaller checks and for immediate ATM access to cash.)
DON’T FRET ABOUT THE CROOKS
Folks who grew up dealing only with local banks often worry about others having easy access to the money you’ve invested in funds. Even if someone were able to convince a fund company through the toll-free phone line or on its website that they were you (say, by knowing your account number and Social Security number), the impostor, at worst, could only request a transaction to occur between accounts registered in your name. You’d find out about the shenanigans when the confirmation arrived in the mail or your email, at which time you could call the fund company and undo the whole mess. (Just by listening to a tape of the phone call, which the fund company records, or a record of the online transaction, the company could confirm that you didn’t place the trade.)
No one can actually take money out of your account, either. Suppose that someone does know your personal and account information and calls a fund company to ask that a check be sent from a redemption on the account. Even in such a scenario, the check would be sent to the address on the account and be made payable to you.
The only way that someone can actually take money out of your account is with your authorization. And there’s only one way to do that: by completing a full trading authorization or power-of-attorney form. I generally recommend that you not grant this authority to anyone. If you do, make sure that the investment firm makes checks payable only to you, not to the person requesting the money from the account.
If you like to conduct some transactions in person, some of the larger fund companies, such as Fidelity, and certain discount brokers, such as Charles Schwab and TD Ameritrade, have branch offices in convenient locations. For more information on discount brokers, see Chapter 9.
Addressing the Drawbacks
Still, the fund drawbacks that I’m concerned about are different from the ones that some critics like to highlight. Here’s my take on which fund drawbacks you shouldn’t worry about — and which ones you should stop and think about a little more.
Don’t worry about these …
If you’ve read some articles or heard some news stories about the downsides of funds, you may have heard of some of the following concerns. However, you shouldn’t let them trouble you.
The investment Goliath: One of the concerns I still hear about is the one that, because the fund industry is growing, if stock fund investors head for the exits at the same time, they may get stuck or trampled at the door. You can make this argument about any group of investors, including institutions. Little evidence suggests that most individual investors are prone to rash moves. Funds have grown in importance simply because they’re a superior alternative for a whole lot of people.
Doing business long distance: Some people, particularly older folks who grew up doing all their saving through a local bank, feel uncomfortable doing business with a company that they can reach only via a toll-free number, the mail, or a website. But please recognize the enormous benefits of fund companies not having branch offices all over the country. Branch offices cost money to operate, which is one of the reasons bank account returns are historically so scrawny. If you feel better dropping your money off in person to an organization that has local branch offices, invest in funds through one of the firms that I recommend in Chapter 9. Or do business with a fund company
