Portfolio manager Cale Smith on investing, Spoke Funds®, and Islamorada in the Florida Keys.

Kiplinger’s reports that expense ratios for stock mutual funds are rising, despite a horrific year of performance for most funds.

As described in the article, when assets in a fund fall below certain “breakpoints,” management fees as a percentage of assets increase.

So it could very well be the case that you, my dear mutual fund investor, not only saw your holdings decline in value by 50% last year, but you may have also paid taxes forced onto you by your fund…and now the fees you pay as a percentage of your assets could be going up, too.

You’d think that mutual fund companies might see an opportunity in that scenario to make it up to their investors by, for instance, lowering the breakpoint, or waiving the fee increase for their most loyal investors. At the very least you might think the fund companies would let their investors know that expense ratios will be increasing. Alas, neither will happen.

Mutual funds are broken.

Q. Can you help me win on that Deal or No Deal show?

A. Yes, if winning means maximizing the amount of money you take home, not picking the right suitcases.

Here is my advice: 

Forget about winning the million dollars. The odds say it just won’t happen. The object of the game should be to beat the mysterious Banker, not win the million dollars. To do that, you need to think in terms of expected value.

It makes no difference which suitcase you pick. Each has the same probability of having any one particular number in it. As a contestant, then, you should add up all the dollar amounts on the board at any time and divide by the number of choices left…or in other words, take the average.

The Banker is doing the same thing – figuring out the expected value (or in this case, the average) of all the choices left and then coming up with a number that is higher or lower than that value. If the number he offers to pay you is higher than the expected value (or average) of all the numbers you computed on the board, then you should take his offer. If not, keep playing.

Most people on the show are playing the wrong game – trying to win the million dollars. It’s not going to happen. Beating the Banker is the best you can do.

Try to figure out those expected values the next time you’re watching. You might be surprised how quickly you get the hang of it.

E-mail me if you have a question.

An update of our original video. More about Tarpon, Spoke Fund® and swimming naked.