You would have had to live on a desert island without a television, newspaper, or internet connection to not have heard of 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 referred to as 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 ways of trading their funds, and some companies are imposing high short-term repayment fees (penalties for all intents and purposes) in the name of preventing wrongdoing. But the real idea behind all of this is: Buy our fund and never sell it!
These companies advocate a stubborn Buy and Hold philosophy despite the devastating effects that focus had on investor portfolios during the recent bear market. Performance is irrelevant to them – they want your money in their fund, whether it goes up or down.
With all the negative press over the months, you’d think mutual fund companies would have cleaned up their act and started giving more consideration to the individual investor. Not so.
I realized this when a fund manager for an $ 800 million mutual fund called me to see what my plans were regarding maintaining our positions with his fund (about $ 2 million).
I explained my trend-following methodology to him and he was very upset when he heard that I would protect my clients’ accumulated earnings by selling their fund if it fell 7% from its highs.
His bravado made it quite clear that he did not 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 them from being taken advantage of? For one thing, do what your mutual fund company does, not what they tell you to do. Adopt a strategy to follow trends, as I do, and use the mutual fund manager’s superior stock picking capabilities to your advantage by buying and holding only as long as the fund is performing well.
Remember, the fund manager has a major disadvantage on you: you always “have to” invest so that the public can 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 run for cover. Can not. You are constantly trying to adjust your portfolio to ever-changing economic conditions to minimize your potential losses. At the same time, you are told that your fund is the investment for all seasons. Don’t 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 reality it is a losing proposition.
The bottom line is that you use a well-performing mutual fund during strong uptrends and stay on the sidelines during trend reversals. (That’s exactly what I did for my clients in October 2001, and we kept most of their profits while Buy & Holders insisted that the emperor wore new clothes.) You will soon feel like you are in charge of your finances. the destination and any mutual fund chosen is simply a tool to bring you closer to your goals of maximizing your profits and minimizing your losses.