Mutual funds were created with the idea that one person can specialize and manage the investments of a large pool of money from multiple investors. Before the great depression mutual funds were called investment pools and mutual fund managers were called pool operators. The bull market of the 1920's created a time of economic prosperity akin to the 1990s. The conceptualization of the pyramid scheme occurred at this time as well.

Ironically, the pyramid scheme had been debunked in 1920 when Charles Ponzi was arrested for offering investors unsustainable returns on postal certificates. The investors lost all of their money in Ponzi's elaborate con job for which his name became synonymous. He was reportedly making a killing buying the postal certificates in Europe at low price and selling them at high prices in the United States. Con jobs in general like the one perpetrated in the movie “The Sting” with Robert Redford and Paul Newman were labeled “Ponzi Schemes.” The public never saw through the investment pool concept as a new form of Ponzi scheme.

Investment pools eventually became thought of as a rip-off in the mind of the public. This is because becoming a pool operator was like having a license to steal. Instead of focusing on the interests of the public who had money in the “fund” the pool operators would engage in risky investments because the money was not theirs. They would also pay themselves extremely large fees. It became very clear to the public that investment pools were a big-rip off in the aftermath of the stock market crash of 1929.

There was so much abuse by pool managers that the Security Exchange Commission (SEC) was formed in large part to stop these rip off artists. The SEC effectively shut down the more blatant con jobs. Then the securities industry came up with a fancy new name for investment pools to suck the public back in: “Mutual Funds!”

If your 401(k) provider offers an indexed mutual fund then put your money into that. An indexed mutual fund uses a stock market index such as the S&P500 to guide which stocks are bought. The biggest and oldest indexed mutual fund is the Vanguard 500 (VFINX).

A computer divvies up the cash in the fund to match the index as closely as a possible. As such, there is not fund manager to sitting on your hard earned retirement savings to rip you off in bogus fees.

About the Author
ABOUT THE AUTHOR: Dr. Scott Brown, Ph.D., the Wallet Doctor, is a successful investor. Dr. Brown holds a Ph.D. in finance. The Wallet Doctor is sought after for investment advice and coaching. For more information visit Dr. Brown's site at www.BonanzaBase.com or sign up for his investment tips at www.WalletDoctor.com