You would have to have lived on a desert island with no television, newspaper, or Internet connection to not have heard about the great mutual fund scandal of 2003.
The problem was that some mutual fund companies allowed certain hedge funds to engage in after-hours trading, sometimes incorrectly called market timing. Unfortunately, some companies have used the confusion over the term “market timing” to further their own cause. How?
They have used this problem to ban virtually all forms of trading with their funds, and some companies are imposing hefty short-term ransom fees, penalties for all intents and purposes, in the name of preventing impropriety. But the real idea behind it all is: Buy our fund and never sell it!
These companies espouse a stubborn buy-and-hold philosophy despite the devastating effects that approach had on investors’ portfolios during the recent bear market. Performance is irrelevant to them: they want their money in their fund, whether it goes up or down.
With all the negative press over the months, one would think that the mutual fund companies would have cleaned up their act and started giving more consideration to the individual investor. not so
I became aware of this when a fund manager for an $800 million mutual fund called me to see what my plans were regarding holding our positions with his fund (around $2 million).
I explained my trend following methodology to him and he got very upset when he heard that I would protect my clients’ accumulated profits by selling their fund if it fell 7% from its highs.
His bravado made it quite clear that he didn’t like anyone managing for the benefit of his clients; He only cared about what was best for him and his company.
So what can you do to prevent being taken advantage of? For one thing, do what your mutual fund company does, not what they tell you to do. Adopt a trend-following strategy, like I do, and use the mutual fund manager’s superior stock-picking ability to your advantage by buying and holding only as long as the fund performs well.
Remember, the fund manager has one big disadvantage on you: you always “have to” invest in order for the public to buy shares in your fund. You do not!
If market conditions dictate that you are better off in the safety of a money market account because we are in a severe downtrend, then you can take your money and take cover. he can’t. He’s constantly trying to adjust his portfolio to ever-changing economic conditions to minimize his potential losses. At the same time, you are told that your fund is the investment for all seasons. Do not be fooled!
You, as an individual investor, are truly in the driver’s seat. Unfortunately, you have probably been conditioned to think that Buy & Hope is a good investment strategy, when in fact it is a losing proposition.
The bottom line is, use a well-performing mutual fund during strong trends and stay out of it during trend reversals. (That’s exactly what I did for my clients in October 2001, and we kept the lion’s share of their profits while Buy & Holders kept insisting the emperor was wearing new clothes.) Very soon you will feel that you are in charge of your finances. destination and any mutual fund chosen is simply a tool to bring you closer to your goals of maximizing your gains and minimizing your losses.