How to beat mutual fund companies at their own game
You would have to have lived on a desert island with no TV, 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 referred to as market timing. Unfortunately, some companies have used the confusion over the term “market timing” to further their own cause. As?
They have used this issue to ban virtually all forms of trading their funds, and some companies are imposing hefty short-term redemption 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, you’d think 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 of 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 angry when he heard that I would protect my clients’ accumulated gains by selling their fund if it fell 7% from its highs.
His swagger made it quite clear that he didn’t like anyone to get away with it for the benefit of his clients; He only cared about what was best for him and his company.
So what can you do to avoid being taken advantage of? For one, 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 is performing well.
Remember, the fund manager has one major disadvantage over 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. he can’t. 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. Do not be fooled!
You, as an individual investor, are truly in the driver’s seat. Unfortunately, you’ve probably been conditioned to think that Buy & Hope is a good investment strategy, when in reality it’s a losing proposition.
The bottom line is, use a well-performing mutual fund during strong trends and stay out during trend reversals. (That’s exactly what I did for my clients in October 2001, withholding most of their winnings while Buy & Holders kept insisting that the emperor was wearing new clothes.) Very soon you will feel that you are in charge of your finances. destination and any chosen mutual fund is simply a tool to bring you closer to your goals of maximizing your gains and minimizing your losses.