3 Big Reasons Banks do NOT invest in mutual funds!
Recently I received a dividend statement for mutual funds that I hold within a Roth IRA and my 12-month rate of return was –17% and to add insult to injury there were still management fees on top of those losses. Add inflation to this stellar performance and you will start to understand my irritation. What I discovered is that even though my asset allocation within this asset class was conservative and well diversified within the fund, it was still hurt by the economic downturn. I have also come to realize that millions of Americans experienced the same effect. If you are irritated like me, you are going to want to hear the rest of what I have to say.
Reason 1. Banks focus on liquid assets that can be easily accessed to make quick changes in a bear or favorable market. There is nothing a bank desires more with a particular asset class than liquidity. Banks do not like assets they call REO’s (I just can’t stop this feelin anymore, I’ve forgotten what I started fightin for) oh wait wait wait not that REO. I mean Real Estate Owned. It ties up their cash so they cannot put that money to work somewhere else. This is not a linear loss because banks can lend $100 for every $8, they have on deposit (they can print money). Every day a bank holds an asset that is non-performing is an exponential loss of opportunity. Just a hint the same holds true for you but you just do not realize it.
Reason 2. Banks make money by renting your money and selling it back to you. First, they rent money from you that they put in their imaginary vault (some is held in their vault but truly little). They pay you a small amount of interest depending on how much time and what conditions you allow them to subject your money too. Next, they lend your money to you or others who do not really need it. Let us assume that the bank is generous and pays you 2% on your cd and charges you 6% for your car loan. You think 6%-2% is only a spread of 4% or a 4% ROI for the bank and you are more than happy to pay such a meager amount. WRONG 2% to 6% is a 300% ROI if you gave me $2 and I gave you back $6 that is a 300% growth. Banks do this every second of every day 365 days a year. They then sell you shares of their company to fund their everyday operations and liabilities and you are happy to gross 10% within your mutual fund. A bank charter is a license to print money.
Reason 3. Banks hardly ever invest in naked assets, in other words assets that have a tax or debt liability on them. That is why the bank will only invest in real estate assets that are unincumbered by tax liens, mechanic’s liens, or entities that have a claim to the deed. Title companies help banks ensure that all these boxes are checked for the bank before they invest in them.
Bonus Reason. Banks only invest in secure assets. They do not invest in speculative funds like mutual funds or so called “securities” like stocks.
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