A couple of years ago, we felt this sting ourselves. We had a fund that actually lost 12 percent. With individual stocks, you have more flexibility to control your taxes. The Advertising hype You don't have to be a rocket scientist to promote mutual funds these days. The average stock fund has grown at an impressive 18 percent annual rate over the past five years.
Many mutual funds promote their funds by advertising their past performance.
The big problem comes when a fund that has advertised hot performance and attracted tons of money starts to do poorly. Investors attracted by those high numbers are apt to cash out of the fund and go elsewhere. That hurts existing shareholders. The manager is forced to sell securities to meet redemptions. That increases transaction costs and fund expenses the remaining shareholders have to pay.