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Preface

Preface

Many individuals own mutual funds today. Indeed, the mutual fund industry, which reached $7 trillion in assets by 2000, comprises the bulk of many investors' financial assets, whether for retirement or taxable savings purposes. To a large extent, mutual funds are the investment vehicle for the majority of households in the United States.

Mutual funds have served investors well, and their rapid growth reflects their popularity. They might continue to be as popular as ever in the future, but the situation appears to be changing. The change to date has gone almost unnoticed, and the impact is as yet small. Like a snowball rolling downhill, however, this change appears to be gaining in both speed and strength.

The simple truth is there are two sides to the issue when it comes to owning mutual funds. Most investors are continually exposed to only one side—why they should own funds. Only now are some asking the right questions. As more and more investors assume increasing responsibility for their investments, given the sharp drops in 2000 and 2001 and the widely publicized failure of companies such as Enron, an understanding of all sides of important investing issues becomes more critical. That is what I hope to share with readers here.

This change in investors' perceptions about mutual funds is occurring for two reasons. First, the warts have become more obvious. Witness the debacle in 2001 as income tax time rolled around. Many individuals discovered they had to pay taxes on the large distributions made by a number of well-known funds to shareholders for the year 2000 just as the price of their mutual fund shares was declining dramatically. Shareholders are also increasingly discovering that costs are higher, performance is worse, and safeguards are fewer than they originally thought.

Second, only very recently have viable alternatives to mutual funds become available to average investors, and this has changed the game considerably. The previous situation was like voting in the Soviet Union before communism collapsed—you could vote, but there was only one candidate. Now, investors have real alternatives to mutual funds that are growing rapidly. They may very well decide to take advantage.

In short, investors should consider both the pros and cons of mutual funds as well as their alternatives. If you decide to continue with traditional mutual funds, that's fine. Mutual funds have a long and solid history, they have served many investors well, and they are not going away. You can continue to build wealth in a systematic manner by owning mutual funds. By considering the issues discussed in this book, you can make much better decisions about the mutual funds you own and avoid some of the problems that can arise.

However, by considering both sides of the coin, as well as newly emerging alternatives, you will be able to make more intelligent decisions. Until now, most investors have not been able to put the whole story together. They see bits and pieces, but most of the available information tends naturally to focus on the positive side. Even if investors did gain a clear understanding of both sides of mutual funds, they did not have readily available investment alternatives. Now they do!

This book focuses primarily on mutual funds because of their overall importance to American investors. The objective here is not to castigate mutual funds and make them out to be the villains. Instead, I seek to fairly consider the issue of mutual fund ownership and ask the hard questions that typically do not get asked. This means examining a number of potential negatives about mutual funds—issues that investors need to be aware of. By recognizing some of the potential problems, investors can make better decisions and avoid the pitfalls.

I also provide investors with the information they need to consider their alternatives. Although all of these alternatives taken together are still less important than mutual funds, they are becoming more important all the time. If you are to truly take control of your investment decisions and make sound decisions, you need to be aware of all of your alternatives and seriously consider using one or more of them when it is to your advantage.

If after reading the book you can say to yourself, “I understand the issues much better, and I think I can make intelligent decisions about my mutual funds as well as my alternatives,” I have accomplished my goal. You will be a smarter, more successful investor. That's reward enough!

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