“You’re part of the problem,” I said to a sea of faces this week-end.

I was speaking at IDE’s “Boom & Doom” conference this past week-end. Some shrugged. Others looked up in curiosity as if to say, “Me? What did I do to deserve such lousy returns from my portfolio?”

They deserved the truth. “But don’t worry,” I said. “I’m going to show you how to replace lousy returns with a way to invest safely, diversify your portfolio, and boost your returns immediately.”

Their problem – and the problem for 98 percent of investors – is that they’re hooked on mutual funds…

And their savings are paying an enormous price. Get this…

Over the past 15 years, 90 percent of mutual funds have underperformed the S&P 500. Even for a Wall Street investing community that had stopped putting their individual clients first long ago, that is a ridiculously sorry number.

Part of the problem is that mutual funds fail to put all your money to work. The management fees take out a big bite, as do the exit fees. And you get taxed on profits that could have been made before you even bought into the fund.

But mutual funds have a bigger problem. They love to invest in ONLY ESTABLISHED WINNERS, especially those that have high ratings from almost all the analysts covering them. That’s not a good thing. Here’s why…

When the economy began to slow down, these companies couldn’t meet Wall Street’s high expectations. As a result their shares fell.

In waiting for its target companies to establish beyond a shadow of a doubt its growth phase, this mutual funds was consistently too late to the party.

Several studies show that mutual funds as a whole suffer from timidity and the habit of getting into shares when prices are high and peaking.

They then compound the problem by holding on to their falling stocks too long.

“You could make a lot of money by selling when these mutual funds are buying and buying when they’re selling,” I told my sea of faces.

I wasn’t kidding. Mutual funds make a great contrary indicator.

“But people don’t do that,” I said. Instead they pour into the funds that had great success during the last quarter or last few quarters. And what do these funds do with all that new money? They have no choice but to invest it in the class of companies they cover. If it’s large cap, they invest it in big companies. If its high tech, they invest it in Internet-related companies – even if they KNOW that growth in these companies is slowing or even reversing.

“It’s you,” I said, “or people like you who force mutual funds to keep on investing long after the biggest gains have been made.”

“And even if you change your behavior tomorrow,” I told them, “the mutual funds and the vast majority of people who invest in them will continue this self-destructive way of investing.”

Mutual funds are a loser.

And with more than 1,100 Exchange Traded Funds (ETFs) at your finger tips, there is absolutely no reason to stick with them.

ETFs give you the same diversification as mutual funds do.  But they do everything much better…

1.    Look up their portfolios on Yahoo/Finance or their web sites. You can see how they change from day to day instead of waiting for your quarterly mutual fund statement.
2.    They trade like stocks with continuous intraday liquidity. Mutual funds give you their price at the end of the trading day only.
3.    Expenses beat mutual funds by about one full percentage point. ETFs do a great job of putting all your money to work.
4.    Taxes are negligible.

Because mutual funds are managed, they have ample opportunity to make bad decisions. And they take full advantage. ETF managers can’t sabotage growth prospects by choosing chip makers over industrials. Mutual fund managers can and do.

ETF managers don’t try to beat their benchmark. They track and match their sector or country or region benchmark. By investing in the strongest sectors and countries, your investments are sure to go up.

There’s always growth somewhere in the market. The difference now is that ETFs give you a cheap and convenient way to invest in that growth.