MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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The Inside Scoop on Mutual Fund Rip Offs
By Ulli G. Niemann
The bear market that showed up at the end of 2000 has every
brokerage house-as well as the entire mutual fund industry-scrambling
to find creative ways to boost both their image and bottom
line. Unfortunately, this is often at the investors' expense.
Fund managers are ever on the lookout for ways to spin the
stats to hide lousy track records and to find ways to obscure
fees. To add insult to (financial) injury, investors end
up being penalized for selling. So what's an investor to
do? In this case, knowledge is power. Here are some of the
ways mutual fund investors are being taken advantage of:
Performance is always
an issue for any investor. Formerly great funds, which
I've used myself during the 90s, are
the junkyard dogs of this century. Janus Fund comes to
mind and is one of many that buy-and-hold investors got
stuck with. It's down 59%, since we acted on our Sell
signal on 10/13/2000.
- Most of the funds today have 12b-1
fees place, and some go as high as 1% of a fund's assets per year. Between fees,
commissions and management charges, the mutual fund industry
is always getting paid, even if you, the investor, are
losing money. For example, if you had bought SunAmerica
2-1/2 years ago, you would have paid the above fees at
2.35% per year. And, if you finally decided your investment
wasn't going anywhere, you would have been stuck with
a 5% deferred sales charge.
- If you hold a fund less than 180 days, plan on being
hit with a redemption fee. It's almost standard. What's
the deal? Brokers only get paid while you hold their fund.
So, if you're going to sell, they get a last whack. It's
a great deterrent for selling, too. Can this be avoided?
Not completely, but if you have your money managed by an
investment advisor, the holding period is reduced to 90
there's the deceptive no-load rip-off involving B-shares.
Sure investors don't pay anything up front for
these, but you'll pay hefty surrender fees when you
sell. Plus, they carry higher management fees.
Keep in mind that mutual fund companies have market share
in mind, not your best interest. If you think that might
not be true, consider the skyrocket growth rate for pure
technology funds. But look at them now: they've crashed & burned
and no buy & holder has come out with a win.
Then there's the sad story of incompetence in the mutual
fund industry. There are hordes of inexperienced financial
planners (commissioned salesmen) just waiting to sell you
load funds (A and B shares), or to recommend an asset allocation
approach with no real plan or strategy that will serve you
in a bear market.
Of course, there's always the option of having a perfectly
balanced portfolio designed. Such was the case when a prospective
client phoned me in 1999 during the height of the technology
boom. He felt left out because everybody was making money
in one of history's great bull markets, but his portfolio
was so well balanced that he was neither making nor losing
anything. He would have been better off in a money market
To me, the term balanced portfolio translates into this:
I have no clue what I'm doing, where the major trend is,
what I should be buying or whether I should be in the market
in the first place. I'm hedging so much that one investment
goes up and another goes down.
Balance is one thing and safety is really quite another.
And mutual funds do not automatically mean either safety
or balance. The key is always information-knowing how to
get reliable info and what it means once you have it.
This is not for everyone. If you have money to invest and
you don't have the time or the inclination to do the homework,
then your smartest move is to find someone you trust. That
would be someone with a track record you can verify, and
someone who is not going to make money off your investment
every time you buy or sell something.
People like this do exist, and the good news is you only
need to do your homework once. That's when you check them
out. From then on, you can relax knowing you're just not
likely to fall prey to any of the rip-offs that are out there.
© Ulli G. Niemann