In a thought-provoking column, respected journalist Joseph Nocera, who has sung the praises of mutual funds for many years, confesses that he has gone over to the other side. He has dumped all his funds and henceforth will buy only individual stocks. Given a number of unfortunate changes in the mutual-fund industry, he says, the disadvantages of funds now outweigh the benefits. His argument echoes the critiques that have been made by other commentators, but given Nocera's reputation as an advocate for small investors, his challenge carries extra weight.
Nocera's most persuasive complaints concern frequent portfolio manager changes, the harmful effects of huge asset bases, and fund companies' lack of concern for shareholders' well-being. All are indeed serious problems. Add to that a few issues Nocera doesn't mention--the unpredictability of taxable fund distributions, for example--and you've got a compelling case against owning mutual funds.
What you don't have--and what Nocera doesn't provide--is a persuasive case for any alternative. He gives no reason to believe that individuals who forgo mutual funds will prosper by choosing their own stocks. In the days before mutual funds gained popularity, plenty of folks put money straight into stocks, and plenty of them saw money vanish.