Elon Musk’s Twitter Withdrawal: A Lesson in Due Diligence

Elon Musk – the world’s richest person – recently announced that he was pulling out of his agreement to buy Twitter (good luck!). In a letter sent to Twitter, Musk stated that the platform was “in material breach of multiple provisions” of the original agreement, citing a lack of information about the number of Twitter users made up by bots.

For a smart and very funny recap, check out Matt Levine’s Money Stuff.

This saga serves as a reminder that even the world’s richest person understands the importance of due diligence.

Understanding Mutual Funds: A Guide for Investors

Whether you’re an experienced investor or just a beginner, you probably know a little bit – maybe even a lot – about mutual funds. After all, they have been around since the mid-1920s!

It is estimated that about half of U.S. households now own at least one mutual fund.

That said, when you buy a mutual fund, how much research are you really doing – aside from maybe looking at performance numbers? Here are a few tips that might help with your mutual fund due diligence.

1. Ignore the Advertising

Don’t fall for a fund just because it has a catchy name that sounds like a money maker, you saw an ad on a cable program, or your neighbor mentioned how great it was. Do your own research.

2. The Prospectus

A mutual fund has to disclose its activities in its prospectus, but when was the last time you read one? In case you didn’t know, you will find a treasure trove of information you need to make an informed decision before you buy. Prospectuses are really easy to find online too at mutual fund firms’ websites.

3. Mutual Fund Fees

There are many things about mutual funds the average investor might not be aware of – but not knowing about mutual fund fees can literally cost you money. Often, your fund’s expenses can be higher than you think.

Stated expenses (which are required to be disclosed by law) include administrative, management, and marketing fees, as well as front- or back-end commissions. Pay close attention to the “Annual Operating Expenses” section, especially the two-line items that report “Management Fees” and “Total Operating Expenses.”

The Management Fee is how much the fund sponsor gets paid, but the Total Operating Expenses is how much you will pay every single year.

For example, if the total operating expenses are 1.50% and you invest $100,000, you will be paying $1,500 a year for that fund.

4. Look at Cash Holdings

Sure, a fund manager must hold a certain amount of cash for redemptions and purchase opportunities, but remember, you are paying to own that cash. In other words, you may think your money is 100% invested, but it rarely is.

5. Portfolio Turnover

This measure indicates how often a fund buys and sells assets and can give your insight into the strategy the fund manager is following. It’s hard to define a “good” turnover figure, as it depends on the investment style being pursued.

However, if a mutual fund has a portfolio turnover of, say, 100%, that means that every single holding was bought and sold within the year, which should give you pause.

6. Fund Manager Tenure

If there’s a new manager every three to five years, that may be a red flag. You want someone with a proven track record leading your fund.

7. Mutual Fund Rankings and Ratings

While it’s easy to get caught up in Morningstar ratings or Lipper rankings, these should not be your sole decision-making metrics. They do serve a purpose, providing a sense of a fund’s risk-adjusted returns and how well it has performed relative to others in its category, but they have limitations.

Consult a Financial Advisor

You don’t need to become an expert on mutual funds, but knowing the basics is crucial. Talk to a trusted financial professional who can help you understand the good, the bad, and the fine print.

That’s exactly what Elon is doing with Twitter, I guess.

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