How Big Can Mutual Fund Losses Get?

Memphis, TNThe question that faces people who have money invested in mutual funds is, how big can mutual fund losses get? The answer is, they can actually get much bigger. As stocks, hedge funds and even the price of oil drop again and again, invests who relied on mutual funds to see them through the tough times are discovering that even those relatively safe investments will not get out of this unscathed. Many mutual fund investors have already lost a lot of money.

How bad is it? Well, Standard & Poor's 500 Index, which is tracked by many mutual funds, has dropped further than it did in 1931, during the Depression. And it appears that the situation may only get worse. With some big financial companies declaring bankruptcy and selling off their divisions (such as Lehman Brothers selling off its Neuberger division), there is no end in sight to the downward spiral of the stock exchange and related investments.

And, while families are left wondering how to cope with recent events, older people approaching retirement with only their mutual funds to support them could be facing some bleak times. After working their whole lives to save for retirement, a retirement in which they did not plan on having to worry about finances, they are learning that their mutual funds have suffered dramatic losses in value—possibly putting their plans for retirement on hold. Of course, they can only work if there is a job to go to, and even that is not a given in the current economic climate. Furthermore, seniors with health problems may not be able to work at all, putting them at risk for falling into debt.

Although the financial crisis will hit families hard—very hard—at least they have time to recover their losses. People who are approaching retirement age do not have the time to make that money back. Their mutual funds may have dropped up to 30 percent in the past month, far too much of a loss to make back in time to retire.

People who make their money in the mutual fund industry face lean times, too. Firms involved in mutual funds are laying off employees to deal with the financial crisis. BlackRock, Capital Group Companies and Fidelity Investments have all announced layoffs and staff reductions.

The problem with some mutual funds was set off when many investors tried to pull their money out of the same mutual fund at once. This prompted fund managers to sell off assets quickly, which usually results in the assets being sold at a loss. Thus, the funds dropped in value.

Of course, an important question surrounding mutual funds is whether or not advisors and managers acted in the best interests of their investors. It is their duty to do so, but this does not always happen. Sometimes, they try to act in the best interests of their firm, leaving investors in the lurch. If the advisors and managers did not act in the best interests of their investors, investors may be able to reclaim their lost money either through arbitration or through a lawsuit. In fact, for seniors approaching retirement age, an arbitration claim or a lawsuit may be the only way to get their money back so that they can afford their retirement.