According to Mike and Della Hanson, a Salt Lake City couple
in their middle 30s, mutual funds were one of the biggest disappointments
in their lives. In 2002, they invested $11,500 in the
Fidelity Select Gold mutual fund. Three months later, their original
investment had lost almost 15 percent, or about $1,700.
What went wrong?
Three months after their investment, the Hansons admitted
they had invested money without researching the Fidelity Select
Gold fund. They made their investment choice because Mike
had heard a “high-powered” financial planner on a radio talk
show raving about gold as the “ultimate” safe investment. Over
the next two days, Mike convinced Della that gold was an investment
that could be trusted. The Hansons would have purchased
the gold coins the talk show host was selling, but Mike
lost the 800 phone number. For lack of some other way to invest
in gold, they decided to purchase shares in the Fidelity Select
Gold mutual fund. Besides, they reasoned, shares in a mutual
fund would be a better investment than purchasing individual
coins because mutual funds provided diversification and professional
management. Both thought they were choosing the right
investment. What could be better than a mutual fund that “specialized”
in gold? Their investment would be a safe choice even
if other investments went down in value.
The Hansons also thought that since everybody was investing
in mutual funds, they had to be the perfect investment. After
all, there were over 8,300 different funds to choose from. Indeed,
it seemed almost fashionable to invest in mutual funds.
Because of professional management and diversification, there
was no need to evaluate a mutual fund. Certainly the fund manager
knew more about picking the investments contained in the
fund’s portfolio than they did. It seemed mutual funds were almost
guaranteed to increase in value. But after losing almost 15
percent in three months, they realized that “almost guaranteed”
was not the same thing as “guaranteed.”
At the time of their investment, both had heard good things
about Fidelity mutual funds. A number of their friends had
opened accounts with Fidelity and had done well. And Fidelity
made it so easy! Just fill out an application, send the money, and
let the professional managers make all the decisions. In fact, the
Hansons didn’t realize that Fidelity, one of the nation’s largest
mutual fund families, offered over 100 mutual funds, ranging
from very conservative to very speculative investments. Simply
put, they chose the wrong Fidelity mutual fund.
Questions
Often investors indicate that diversification and professional management are the two main reasons they choose mutual fund investments. How important do you consider these two factors? Why?
At the time of this publication, Fidelity sold over 100 mutual funds ranging from very conservative to very speculative investments. Why do you think a fund family would offer so many investment alternatives?
According to the Hansons, everybody was investing in mutual funds—indeed, it almost seemed fashionable to invest in mutual funds. In your own words, what did the Hansons do wrong?
Obtain information about the Fidelity Select Gold fund and one other Fidelity fund at the library or via the Internet. Then complete a mutual fund evaluation form (see the Financial Planning Calculations feature on page 545) for each fund and answer the following questions.
What sources of information did you use to evaluate each fund?
What fees must investors pay to invest in each fund?
What is the investment objective for each fund?
How would you describe the fund’s financial performance over the past 12 months? The past 5 years? The past 10 years?
How would you rate the risk associated with each fund?
Would you invest your money in either of these funds? Justify you answer.
Source: Values for the Fidelity Select Gold fund based on information from
the Yahoo Finance website (http://finance.yahoo.com), August 12, 2002,
Yahoo, Inc., 701 First Avenue, Sunnyvale, CA 94089.
