Mutual funds are diversified. Diversification is supposed to create steady returns. I simply do not believe it does. Mass psychology reigns in mutual fund investing. By definition, a mutual fund is a herd of mindless investors led by an adored mutual fund manager.

Mutual fund complexes promote their newest and hottest fund. Investors pour cash into the fund. The manager’s ego soars. He buys more of the same stocks that drew in investors, puffing up the price of the stocks and the return from the fund. The hot fund is discovered by the financial press and more money pours in, more stock is purchased, and returns look even better. When all the buyers are in, a chat room rumor declares the fund and its stocks as over-valued, investors panic about redeeming shares, the fund manager is forced to sell at any price to meet redemptions further depressing stock values and the fund asset price, which panics more investors who redeem and send shares lower still. The depressed fund manager then abandons his old investment style, unloads the rest of the stocks at still lower prices, and moves into stuff remaining shareholders have no interest in owning. They redeem and send prices down again.