What s up guys! It s Jason here and welcome to my YouTube channel, the Death of Mutual
Funds Insight. In the late 1980s and in most of the 1990s, mutual funds were all the rage
in the United States. While mutual funds are obviously still traded and relatively popular
today, ETFs come up in conversation just as frequently among anyone with even a bit of
financial knowledge or at least a 401K. Similar to many other financial terms, typically when
someone throws around the term, mutual fund, it sounds like jargon; something only a specialist
or expert would know how to explain. In fact, if a YouTuber stopped you on the street to
ask you what a mutual fund is, would you be able to explain? Luckily, you don t have to
answer that question.
Put simply, a mutual fund is a professionally selected and managed group of stocks, bonds,
and other securities that allow individual investors to access a diverse range of investment
options while spending less money. Mutual funds have different themes which are decided
by the individual investment company that owns them. For instance, a mutual fund could
be ESG-themed, in which case they offer shares from companies that have a positive track
record or are on their way to being sound in terms of their environmental, social, and
governance policies and actions. This could range from companies like oat-milk producer
Oatly to environmentally friendly-baby and children s products company, Honest, founded
by actress Jessica Alba. Alternatively a mutual fund could be country- or region-based, with
an Emerging Market theme offering shares from Chinese, Indian, Russian, and Saudia Arabian
companies. A company that is included in the mutual fund does not own the mutual fund and
is not involved in its management. Rather, the financial company that is offering the
mutual fund, such as Fidelity or T. Rowe Price, own and manage their mutual funds. Today we
ll go over the story of Mutual funds. Why Mutual funds, the rise of mutual funds and
finally are mutual funds losing popularity and the decline of the mutual fund industry.
With that, you ll know by the end of the video why you should sell your mutual funds today.
But before we begin If you wouldn t mind just tapping that LIKE button for the YouTube algorithm,
I would really appreciate it. The more engagement a video like this gets, the more likely the
YouTube algorithm is to push it out to more people to enjoy. And as this is a brand-new
channel I started this year, I appreciate it a million fold. To add to that, I also
respond to all comments and feedback! If you love to make money, be sure to subscribe and
hit that notification bell for new videos each week. Thanks for doing that and now let
us continue on with the Rise and Fall of Mutual Funds.
Why Mutual Funds?
The fundamental appeal of mutual funds is that you can get a lot of bang for your buck.
Let s say you re interested in investing in the electric vehicle space, especially in
one of the most famous EV companies, Tesla, but you don t want to invest $600 something
dollars on just one Tesla stock. An electric vehicle or green energy mutual fund that includes
Tesla and its Chinese counterpart, Nio, is one way of investing in multiple green companies
without having to invest your life savings to buy relatively few shares of big name companies.
In fact, many mutual fund companies allow individuals to start investing for as little
as $1,000. To put that relatively low figure into context, just one share of Amazon stock
would cost more than $3,000. It means you could invest in a mutual fund and thereby
access a group of stocks for less than it would cost to buy into Amazon at the moment.
Another important reason for its one-time popularity is that they re professionally
managed and the stocks that compose your mutual fund of choice are pre-selected by the management
company. Interestingly, about 71% of polled Americans rate themselves as financially literate
according to a FINRA study, yet in 2009 only 42% of polled Americans were able to answer
4 of 5 financial literacy questions correctly. By 2018, that dropped to 34%. Despite that
disparity between some Americans perceived and actual financial knowledge, mutual funds
are still used today, in part because they require minimal input from individual investors
about which individual stocks are best or which stocks to choose. There s no need to
wait to become more educated about individual companies to make the best decision. Instead,
individual investors really only need to have an idea about which investment themes or flagship
companies they would like to invest in. For investors who don t feel confident about their
financial knowledge or don t want to spend time daily checking investment apps such as
Robinhood or Acorns, mutual fund managers get paid to do that. Typically, they actively
manage the funds by making decisions about when to reinvest gains or distribute them
to their mutual fund investors. Capital gains or losses by mutual fund managers are passed
onto investors. Win or lose, you pay for the mutual fund managers decisions. You might
ve already guessed it, but mutual fund managers have a strong incentive to maximize investors
returns: their compensation is tied to the fund s performance.
Popularity in the 80s and 90s
All of those strengths helped mutual funds become most popular in the 1980s and 1990s
with the term seemingly thrown around by everyone from soccer moms to Wall Street professionals
to your average nine-to-fiver. Despite that fairly recent popularity, in actuality, the
first mutual fund, the Massachusetts Investors Trust, was created in 1924 in Boston. By the
time the stock market crashed in 1929, prompting the Great Depression, there were already 19
open-end mutual funds in the United States and 700 closed-end funds. The difference between
open-ended and closed-end mutual funds is that open-end funds are available for investors
to buy shares at any time because they can issue more, whereas the latter have a fixed
amount. These days, mutual funds are mostly open-end funds.
Considering the long history of mutual funds, why the boom some three to four decades ago?
One of the main drivers was the blazing bull market of the 1980s. Fueled largely by President
Ronald Reagan s business-friendly policies of reducing interest rates and promoting economic
growth, buy orders flooded the New York Stock Exchange, with the decade seeing its highest-then
trading volume. Investors and fund managers were optimistic about the gains that could
be had with the stock market, rather than other traditional investment vehicles, such
as antiques and real estate. Mutual funds were the next big hot thing because they were
seen as less risky than tangible assets, while still spreading risk better than investment
in individual stocks.
The rise of tax-exempt accounts such as Roth 401(k)s and and tax-deferred accounts such
as a Keogh plan, which is a tax-deferred pension plan, also fueled the mutual fund boom. In
fact, while today 401(k) and pension plans seem like a given, in reality 401(k) plans
were only instituted by the IRS in 1981. In 1983, $5.9 billion in mutual funds made up
IRA investments, while by 1985, that amount had grown to $18.6 billion. That fast-tracked
growth just so happened to dovetail with famed money manager, Peter Lynch, managing the portfolio
of the Fidelity Magellan Fund, between 1977 and 1990. In those 13 years, he averaged a
29.2% annual return, which was more than double the performance of the S&P 500. Though by
all means an atypically long and impressive victory lap, Lynch showed that with expertise,
mutual funds could outperform even a S&P 500 index fund, which matches the performance
of the 500 companies that make up the S&P 500.
The fortuitous meeting of a very long bull run, President Reagan s tax policies, and
increased awareness about mutual funds because of all-stars like Peter Lynch, helped stock
funds grow so dramatically that one research firm showed that in 1984, 5.2 million Americans
owned mutual funds but no stocks. Just a year later, in 1985, the same study showed that
mutual fund ownership with no stock ownership almost doubled at 11.2 million. Indeed, at
the beginning of the 1980s, a bit over 500 mutual funds existed. About a decade later,
the number of mutual funds increased to about 5,000. That s a 900% increase. For mutual
fund companies, managers, and the retail investors who trusted them with their money, it was
probably a good thing. Too much of a good thing can turn sour though, and while mutual
funds haven t gone away, they have to compete for investors attention in a much more competitive
landscape these days.
Becoming Less Hyped
Mutual funds have grown in leaps and bounds since the 1980s and 90s, but it doesn t have
the same cache as it once did for a variety of reasons, spanning the rise of apps like
Robinhood to the 1997 tech bubble bursting. The dotcom tech bubble of the 1990s was fueled
by the rise of software and tech startups overall, riding off the ostentatious and very
real wealth of the 80s. Fundamentally, once personal PCs and the Internet started becoming
more accessible, more Americans were eager to invest in any so-called dotcom company
ending in the now default .com domain, causing a high spike in or speculative bubble in some
of the first online shopping sites, such as Pet.com and telecommunications companies,
such as Worldcom. The frenzied trading by retail investors eager to get rich quick,
in turn, encouraged dotcom companies to operate on losses and market themselves at any costs.
In 1999, then-Chair of the Federal Reserve, Alan Greenspan, raised the interest rate a
few times in order to temper the investment frenzy. Shortly after, in 2000, Japan entered
a recession. Those major factors contributed greatly to the economy s subsequent tailspin
with the Nasdaq Composite index falling by 25% in the week of April 14, 2000.
How is the dotcom tech bubble connected to mutual funds losing their luster as an investment
vehicle? Essentially, it led to a weariness to invest as eagerly, even if with a money
manager. In addition, as mutual funds became less trendy, they gave way to passively managed
funds called exchange traded funds or ETFs, which were actually around since the 1990s.
ETFs and mutual funds are both ways for individual investors to invest in different stocks, collectively
themed. However, passively managed in the case of ETFs means that they are designed
to track whichever indexes are relevant to their collection of stocks. For instance,
if you re interested in buying a S&P 500 ETF, guess which index it tracks? Besides that,
it mainly distinguishes itself from mutual funds by being traded often throughout the
day while the market is open, unlike mutual funds which are traded just once a day and
after markets close. The higher liquidity that ETFs offer relative to mutual funds because
they are traded so often means that investors could sell for cash faster than mutual funds.
It becomes a safer option because your money is less tied up when you may need or want
it. It was the perfect alternative to mutual funds after the dotcom tech bubble; ETFs offered
the potential to make money, but with less of the cost and risk associated with mutual
funds.
And that brings us to today. The rise of apps like Robinhood, which was founded in 2014,
added to the whirlpool of investment choices that made mutual funds less of the go-to money
making option for non-professional investors. The California-based app is a brokerage that
has no commission fees for trading. ETFs can be traded on Robinhood, but mutual funds cannot.
As of 2021, Robinhood reported that it had 17.7 million active users. As of 2020, about
45.7% of American households owned mutual funds. That seems very impressive, except
when you take into account that mutual fund ownership by households has barely increased
by a full percentage point since 2000.
To put that into context, in 2014, Robinhood had 340,000 people on its waitlist. A month
before it launched, in March 2015, that waiting list had grown to 700,000 people. It reached
1 million users in 2016, doubled by the next year, tripled by 2018 to 6 million, with its
total transactions growing at an equally rapid pace. In 2016, its total transactions were
only $0.5 billion, while the next year it was $50 billion. By 2020, it had increased
by 600% to 350 billion. Startling growth for an unconventional brokerage. While zero-commission
brokerage seems just as intuitive now as 401(k)s did, before Robinhood, brokerages typically
charged $5-$10 per trade and required a minimum deposit of $500. Robinhood and competitor
apps changed the investment game by offering anyone with interest in investing the chance
to do just that. No need for a money manager. No need to bank much of your retirement income
on 401(k) and mutual fund returns. Anyone can be as big or small of a risk-taker as
they choose and check their investments in real time with the app. It doesn t mean mutual
funds are dead - far from it. They are, however, suffering from the same problem as many other
industries: with the advent of the internet, more competition for a share of people s wallets
and attention.
So with that said, thank you so much for watching my video. There was a significant amount of
research and production that went into making this video possible. As this is a brand-new
YouTube channel I just started this year - if you enjoy videos like this, please click the
subscribe button and hit that notification bell! I respond to all comments! If you haven
t seen already, check out my video on the Rise of Coinbase or What does it mean to be
wealthy in 2021. As always, stay happy and healthy and stay tuned for another episode
of Company Insight next week.