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Regulated Mutual Funds Avoided Blowups |
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If the financial tumult of the last few years has proved anything, it is that investors are better off sticking with highly regulated mutual funds. Hedge funds, private equity deals, residential real estate-all experienced major frauds, blowups, and insolvencies over the past two years. Although many mutual funds declined in value as the stock market fell in 2008, none went out of business due to fraud, none restricted investors from getting their money out, and the average fund recovered nicely as markets went back up in 2009.
Madoff-mania
Investors who were duped by Bernard Madoff, Stanford Financial, and other Ponzi schemes did not do that well. Nor did investors who put money into unregulated hedge funds that ended up suffering severe losses and restricting investors’ abilities to get their money back.
Madoff’s massive fraud is now widely known. Less well known but just as bad was Stanford Financial, an Antiguan bank run by American money manager Allen Stanford, who sold phony "certificates of deposit" worth $8.5 billion to over 30,000 clients. Even investors in legitimate investment pools like hedge funds suffered severely during the financial crisis. By some estimates 117 hedge funds suffered major losses over the last three years.
Lehman's losses
How is this for bad judgment: The failed investment bank Lehman Brothers was custodian to hundreds millions of dollars in hedge fund assets. Lehman used those assets to secure its own borrowing, and some of the hedge funds have lost their assets to senior creditors of Lehman.
Mutual funds, on the other hand, have been tightly regulated ever since Congress passed the Investment Company Act of 1940. Congress recognized that small investors would be the principal investors in mutual funds, and took steps to protect their interests.
Mutual funds are required to be registered with the Securities and Exchange Commission, to make extensive disclosures to submit financial statements audited by outside, independent accountants, and to segregate client assets with regulated and qualified custodians.
©OSB Financial Services, INC
©2009, Kelly Ruggles Web site
Kelly C. Ruggles is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions
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