Remember, all prospectuses can lie. If Charles Ponzi had issued a prospectus (did they have prospecti back then?) it would’ve been about postage slip arbitrage, which is an incredibly simple concept to understand, and not a bad one, on the face of it. His namesake scheme was to compensate for the fact that his investment strategy wasn’t actually working that well.

Also, re:load funds…most of load funds’ shares are sold without loads these days (institutional- or advisor-class shares, or R-class shares for 401(k)s). So people investing in load funds in their 401(k) often are getting a load fund sans load, and if you can get advisor-class shares, you often don’t have 12b-1 charges, either…though the expense ratio will still usually be pretty high.

I have blindly invested with a financial Advisor (sales person) at a large firm. After watching my $$ quickly erode I had decided to just “get out” but am not sure where to go. I am a newbie and am interested in this mysterious investing game and am cramming to learn as much and as quickly as possible, but guys, investing is extremely complex. I’m not greedy; just don’t want to be poor when I retire. Now my Advisor wants to place my $$ in ETFs instead of mutual funds. He is begging me to not leave him…. maybe I should…. maybe I shouldn’t. What would you do? Allow him to continue and only invest in ETF’s for me or leave? I have put off seeing him, because I have not found the questions to ask him regarding his new suggestion? Advise? Pretty please?

A mutual fund prospectus is like a company annual report.
They will both give you the most reliable information about a particular investment in a fund or company.
I use the words “most reliable information” in the relative sense rather than in the absolute sense.
Even though it is the most reliable information that doesn’t mean that it is accurate!

But unfortunately, very few would-be investors read either type of document (including the appendices and notes and statements of additional information) before investing in the fund or company.

Prospectus and Annual Report documents generally have vast amounts of information about how the fund / company work that you will never find anywhere else. And about how the rules of the game might change in the future for the fund or company.

Just make sure that if you click on the “3 ETFs Ready To Surge” Google Adsense link on this page to get the free report, that you apply Neal Frankle’s rules to your review of the report!

Mutual funds offer great diversification opportunities, but you should know what you are getting into . . .

The major issue with him is that the watchdogs didn’t bark because they knew Madoff, and he was “a great guy”. His charisma was enough to get people to foolishly invest their money with him.

I’ve read so many articles showing statistics about how mutual fund performance can be “steady” for 3-4 years and then fall off the face of the earth.

And Sharon, your point is also well taken. But Madoff didn’t run a mutual fund. Had he done that, he would not have been able to do what he did because with a fund, the company doesn’t actually have the money. In any event, you are right. Anybody can say anything and promise anything. He even printed his own statements! One thing I can tell you. I’ve met a few people who did invest with Madoff and at least those I met didn’t have a clue of what Madoff did w/their money. Also, and much more troubling, I’ve met 2 CPA’s who couldn’t understand the tax statements they got over the years from Madoff. I don’t know why they didn’t blow the whistle or raise a red flag but had they followed the rule of not investing in things they don’t understand – it would have saved their clients a fortune…

A criminal can put whatever claims they like into the prospectus, and not bother following it. I’m sure Bernie Madoff’s prospectuses looked too good to be true.

But I will agree with Neal that if there’s anything in those disclosure documents that makes you feel uncomfortable, or you disagree with, find another fund to invest with.

Also, once you flip through a few prospectuses, you will become familiar enough with the layout and content to quickly find what you need as you look at others in the future. This is a good skill to have.

I’m amazed how some people will spend so much time figuring out which digital camera to buy, even downloading and reading operating manuals before hand. Yet, others will spend much more money a mutual fund that got mentioned in a magazine, at a family gathering, or by a broker without reading even the prospectus!?!

Anyways, I now know how to interpret fees and expenses. I guess my loaded funds have really low fees/expenses and so I will stick with them. But any future investments will probably be put elsewhere and I will find a fee-based financial advisor.

Then again, the same agent sold my parents on the idea that I needed life insurance at that young age, and I still have that policy though I don’t have any dependents. Gah.

I’m not sure that reading these things does you any good, people seem to just read them on principle. I’ve never heard of someone deciding *not* to do something after reading the contract — such as for a mortgage, a cell phone contract, or the end-user license agreement for software.

This is similar. You’re going to read it, and at the end you’re going to say “ok, seems fine”, just like you’ve done with every single other contract you’ve ever signed in your life.

By and large the significant leeway fund managers reserve for themselves is only used in extraordinary situations, and the description of what they plan to do with your money is what they will do with your money.

The fact that they’re allowed to do some of the things they’re allowed to do should raise your eyebrows and you should investigate further, but the mere fact that a fund can invest in futures as a hedging strategy doesn’t mean they’ll be cowboying the options market like Slim Pickens.

“Never mind what you think you’re buying. This fund can jolly-well invest in whatever it wants to, and which gives it the biggest kick-back. Yes, we know this fund is called ‘safe and sane US government bonds’, but if we want to dabble in Romanian muni bonds, it’s our call.”

Back in 1995, my wife bought a mutual fund touted as “prime plus” from an investment arm of Union Bank. To make a long story short, it never returned “prime plus” or even “prime” for that matter.

She could have done equally as well in a CD.

She finally sold it a couple of years ago, before it tanked “big time”.

Bozo

I don’t read prospectus’ but I also don’t buy actively managed mutual funds – if you do then I agree with Neal that you should try to figure out what they invest in.

One of my complaints about most funds is that they have a lot of leeway in what they invest in and they don’t report their holdings until well after the fact so even if you read the prospectus you can’t be sure of what you own.

I like plain vanilla index funds and etfs because it is much more clear what they own.

So here’s my question: If this fund’s asset allocation/investment objectives fit into your portfolio, would you feel comfortable investing in it? And why or why not?

My favorite thing I’ve ever read in a prospectus was in Vanguard’s Target Retirement Funds’ prospectus. It says, flat out, “Do not invest with Vanguard if you are a market-timer.” (page 66)

Love it.

Time and time again I find that people continue to invest in managed funds and/or use financial advisors that have much different motives than you and I. As you stated, fees, loading and churn are always over-looked and in the short-term look to be ‘no big deal’. However, over time these can become large sums of money as retirement savings happens for 40 years.

A couple months back I had a similar guest blog written (all be it on a much lower level), but is focuses on the pros and cons of index investing:
http://www.twentysomethingsense.com/2009/03/index-investing.html

Do you think this is simply another case of media twisting the consumers arm? Everyday I see something in newspapers about mutual funds. And every month there are magazines littered with titles such as “top 10 mutual funds for 2009″. If they are such a bad deal – why doesn’t anyone say it!?

Seems like a no-brainer to throw that in there.