A Suze Orman exclusive

Let's fast-forward through the "pro" argument for mutual funds, since we can all recite the reasons in our sleep: instant diversification across dozens of stocks in a variety of sectors, professional money management, low investment minimums, cheap fees if you know how to pick right.

Now that we've dispensed with the obvious, let's spend a few minutes understanding one of the biggest problems with mutual funds. And I'm not even referring to the lingering mutual fund scandal where some fund managers screwed over their shareholders by giving preferential treatment to a few big shots who market-timed and late-traded the funds.

That's bad enough to make me think twice about how consumer-friendly funds really are. But what really gets me peeved is how illiquid funds are. Let me explain.

Imagine this scenario: It's 10 a.m. and you hear that the market is tanking. You have been on the fence for a few weeks, wondering if it's time to get more defensive, but this latest market slide pushes you into action. You quickly call your fund company or discount brokerage and sell your aggressive funds. Then you sit back and watch the market fall another 200 points, with the calm satisfaction that you got out before the damage was done.

That would be premature gloating, my friends. Despite the fact that you called your fund company or emailed your 401(k) plan administrator to make the change at 10 a.m., your "trade" isn't put through until the close of the trading day, which is 4 p.m. Eastern. In technical terms, mutual funds don't trade "intraday." They are only priced once a day, and that price is based on the stocks' closing price. Place a sell order at 10 a.m. Eastern and you won't get your sell price for another six hours. On a day like October 19, 1987, when the S&P 500 stock index fell 20 percent, even if you had placed your sell order early in the morning, you still would have been issued a sell price that was likely a fifth lower than that at the closing bell.

The same problem exists when the market is on an upward tear. Let's imagine you again are watching the market and see that a major policy change by Fed Chairman Alan Greenspan has sent the S&P 500 on a huge run. You place a buy order with your fund right when the market opens. But once again, your purchase price isn't going to be set until the close of that trading day. If the market jumps a few hundred points that day, you're not going to make a penny from it.

That old-fashioned fund policy is so Betamax, if you ask me. Or let me put it in language any Yahooer will appreciate: why would you stick with a 14,400 dial-up connection when you can have a super-swift DSL setup?

Mutual funds remind me of dial-up. Exchange Traded Funds (ETFs) are the investing equivalent of DSL.