The Stock Market Game - The Greatest Investment Illusion Isn't a Ponzi Scheme

The mutual fund industry pours a lot of time and money into making sure you hear the message, "Your investments are safe with us." Stealing your principal is illegal. Stealing a huge share of your increase is not. You have to know how the mutual fund industry is making you poorer.

Here is a brief bit of history:

In 1791, stocks started trading in lower Manhattan. This was a small beginning to what became what may be the prototypical American institution of Wall Street. 120 years later, in 1924, the first open-ended mutual fund started, called Massachusetts Investors Trust. To give a little background, at first, if mutual funds didn't produce any income, you didn't pay any fees. This was because in the teens, 20's, and all the way up through the 1970's, people wanted income. They wanted dividends. If, by the end of a year, the mutual funds didn't produce income, you didn't pay a fee. The purpose of opening the Massachusetts Investors Trust was to bring investment expertise to people who didn't really have the time themselves to invest in the market.

In 1929, the stock market crashed. At that point in time, only 6% of the US population invested in the stock market. 

Now fast-forward from 1929 to 1978 (we're just giving a very high-level view here). In 1979, something called the 401 retirement account was introduced. "401" is the number of the IRS code that allows these. Basically, it said that managers, directors, and owners could put away pretax money into a retirement account. In 1981, Section K was added to the IRS 401 code, so 401(k) was introduced. The race was on to involve everybody in one way or another. What, after all, is more sacred and responsible than saving for retirement? Income goals were replaced by retirement goals. So this was an easy leap. Most everybody bought into the idea that "paper" losses aren't real, because after all, you hadn't retired yet, right? That really was the beginning of the shift to an "investment-industrial complex." It wasn't until 1981 that the bulk of the United States population started investing their money in the markets. Prior to that, the bulk of investing, first and foremost, was done by defined pensions and Social Security. Individual people really did not invest in the stock market. 

In 1981, there were 288 mutual funds that represented about $135 billion. To put that in perspective, in 2007 there were 6,000 mutual funds that represented about $10 trillion. That's a 74 times increase, from $135 billion to $10 trillion, in just 26 years. Over the same time period, the expenses that mutual funds charge also ballooned. 

Why this matters to the average investor today: In the same time period, mutual fund expenses - the fees investors pay -- went up 130%. That means management fees grew 80 times faster than the assets the mutual funds had under management. This was a phenomenal transformation. This made some people extremely rich, and a lot of people in the mutual fund business just very rich. The fund managers get rich regardless what happens to your money: grow your money, the managers get rich; lose your money, and the managers get rich. 

In 1990, only about 8% of all the stocks in the US were in mutual funds. By 2007, 25% of all stocks were in mutual funds. At this point, the mutual fund industry started controlling the direction of the market. In 2007, there were about 90 million people with money in mutual funds, compared to 1980, when only about 6% of the US population was invested. In terms of a percentage of people who could invest, today that number is somewhere north of 76%. 

The question is, how well have mutual fund holders been growing their wealth? One study that covered 1984 to 2000, found the average mutual fund holder grew their money 5% a year. The market during that same time period was growing at 17% a year. That is more than a 3X difference. And this was an unmanaged index. 

If the average investor really wants to have an economic future with choices, he or she is going to have to do something different than just put their money in mutual funds and hope things work out. The mutual fund industry/Wall Street is not in the business of growing investors' money. The mutual fund industry was booming: Tremendous growth, huge profits, lots more investors, fund promoters and fund managers getting rich, even if the investors weren't; all for making most investors who bought into this poorer than just the average results of the stock market.

To figure out how the wool got pulled over almost everybody's eyes, you find there's two parts. The first one is how the investors themselves operate, and the second is how the mutual fund industry or Wall Street operates, what I call the "industrial-investment complex." There is a conflict of interest in what mutual fund managers are doing, what fund families are doing, what Wall Street is doing, and what the investor is getting or not getting.

Wall Street "experts" tell their clients that investing is a highly complex business, and you had better act like a lemming and do what your trusted financial expert tells you to do.  But this "strategy" only works in long-term secular bull markets. What about the other 50% of the time?