Thoughts from 2009: I won’t bore you with telling you that there are all types of mutual funds covering virtually any type of financial investment you could imagine. You can get that information easily, but few people want to tell you the uncomfortable facts about mutual funds.

In reality, a mutual fund is what is known as an investment scheme. I find those terms especially appropriate because scheme has a history of having a negative connotation. Don’t lose that thought. Mutual fund managers, stock brokers, and those guys in almost every bank who managed to graduate from High School, and passed the Series 7 exam so that they can sell you investments, will tell you that mutual funds are about spreading investment risk so you don’t get hurt. Have you looked at the balances of your mutual funds lately? Do you feel unharmed?

The aforementioned individuals likely inform their clients that the use of mutual funds in 401(k)s and in Individual Retirement Accounts (IRAs) is about spreading the risk. And they are right, in a way. For this discussion, let’s use stocks as the mutual fund investment vehicle. Generally (and almost without exception), an equity fund has a very small number of strong earners in its portfolio. These are supplemented by a large number of marginal stocks and a few dogs. The theory here is that the marginal stocks will tend to move with the market so the investor gets an appreciation or depreciation of fund value based on market trends. In the best of times, this means you don’t get rich, you don’t get poor, you get to live out your retirement, and you didn’t have to break your head thinking about it. But, this isn’t the best of times, is it?

It is also about spreading the reward too. Remember, mutual funds are nothing more than a group of stocks picked by someone you don’t know, haven’t met, and never will. So let’s look at how the reward gets watered down. If you have an equity stock (let’s say ExxonMobil) as one that comprises 5% of your mutual fund and it experiences an increase of 25% in capital valuation for one reason or another, the increase of 25% is watered down to a 1.3% increase in the value of that particular mutual fund.

In the fairly recent past, it was not unusual for mutual fund managers to crow about their capital appreciation. This is an amusing term to me as it seems to signify that their work is putting money in your pocket. The truth is that it means nothing until you cash out and you (similar to other investors) will cash out slowly. In reality, capital appreciation generally means very little cash to you until you sell. The other (and very important) thing it means is that the manager’s stock picks do not have to be hits since it will be years before you cash out.

The Investment Company Institute, an organization that compiles data on behalf of the International Investment Funds Association, recently released mutual fund statistics from 44 countries. Some of these results are:

-From the end of the 4th Quarter 2007 to the 4th Quarter 2008, worldwide mutual fund assets have lost $7.18 trillion in value. This is an investment loss of 27.5% of investor value.

-By the end of the 4th Quarter of 2008, 31% of all worldwide mutual fund assets were money market funds or other cash funds. The reason for this sort of allocation is that the fund managers have quite a bit of concern regarding the fund’s liquidity. In other words, there is great concern regarding the possibility that there may not be enough cash to cover any large defections from the funds. Therefore, when the “talking heads” for the investment community begin to tell you that the economy is recovering and that now is the time to invest, do their actions support those claims? It gets even more insulting when you think about the earnings these allocations to cash based funds. According to Bankrate.com, a leader in financial rate information, the current average interest rate for money market funds is 1.482%. That means that $5.88 trillion if the world’s investment is earning $87 billion annually in interest. How absurd is that really? One could get a better return by investing in a company selling camel poop in the desert.

What does all that really mean when looking at your portfolio? Well, it means that you may want to rethink the way you view retirement savings and whether mutual funds are all they are represented to be. You may have to reassess how you feel about risk and what risk really is. Investment advisors of all sorts are required to assess your attitude about, and appropriateness for, the risk category of the investment you are about to make. Those factors are your age, earning power, financial strength, and your general attitude regarding whether you expect not to lose money. The latter here is very important since no one could possibly envision making money as anything negative. Absolutely un-American. Investors take other risks, though. How much do you know about the man who sells you your mutual funds? These guys are smart or they wouldn’t be selling you these investments, right? Have you asked to see your broker’s personal financial statement? Have you ever asked and have they ever told you how many clients they individually service? If they tell you four thousand, run…