MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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How (NOT) to Buy Mutual Funds
By Ulli G. Niemann
When it comes to mutual funds, there
is a lot more to success than just finding a good one.
Sad investment stories like the following are all too common.
I hope my sharing it with you will help you avoid making
the same devastating financial mistake one of my former
This story begins during the height
of the investment madness in 2000, just prior to the bear
market. I had been managing an IRA account for "Bob" for
around six years, with a better than average record of
success. So I was surprised when Bob sheepishly called
in July, 2000 to let me know he was transferring his IRA
account, which had done particularly well during our latest
Buy cycle going into the year 2000.
However, his tax preparer, a long
time personal friend of Bob's wife's, was now also offering
investment services, having recently received his Registered
Fast forward to the end of September.
It had become increasingly clear to me that the Bull market
had run its course. So, in accordance with the Sell signal
from our trend tracking methodology, we sold all of our
mutual fund positions on October 13, 2000 and went 100%
into money market. (See my article "How we eluded the Bear
in 2000" at http://www.successful-investment.com/articles12.htm).
From our safe haven we watched the market crash and burn,
causing most other investors to sustain double digit losses
eventually reaching as high as 50 - 60% of their assets.
In 2002 Bob unexpectedly stopped
by my office. As it turned out, things had not gone well
at all with his IRA investments. As most advisors would
have done, his tax preparer/advisor had quickly moved all
of Bob's assets into a variety of "load funds."
Of course, being newly licensed he
was clueless (as were many licensed advisors) as to market
behavior or analysis of any kind. The end result was that
Bob's portfolio lost in excess of 50% over the next 2 years.
(Not to gloat, but my clients' losses in the same period
Unfortunately, the degree of loss
Bob sustained was experienced by many investors who did
not follow a disciplined and methodical approach.
What I find particularly distasteful
is that Bob's tax preparer misused his position of trust.
He made financial decisions that he was not qualified to
make, though his license implied that he did know enough
to make them. So now we know what a piece of paper is worth.
This is no different than letting
a newly graduated medical student with a fresh MD behind
his name perform heart surgery. Or, hiring a new MBA grad
to Chief Financial Officer of a Fortune 500 company. Yet
the financial services industry allows someone to get a
license (after a fairly short course) and to immediately
start making incredibly important and far reaching financial
decisions for anyone he or she can sell their service to.
This is a worrisome trend in this
industry. A CPA friend confirmed that he has been approached
many times by firms wanting him to offer investment services.
Why? It's easy money! Accountants
and tax professionals have a great business base. They
are in a unique position of trust, because of the information
their clients disclose to them. Whether they are employed
by a company or they maintain an individual practice, there
is probably no other person (other than your spouse) who
knows as many intimate details of your financial life as
your accountant/tax preparer.
To abuse this trust for personal
gain-no matter how noble the motive may appear-is a total
conflict of interest and a huge betrayal.
The bear market of 2000 has shown
that investing must be a disciplined endeavor. Even most
professionals have failed to recognize this. What busy
accountant, in the middle of tax season, can put the necessary
time and attention to a volatile investment market that
may require action at a moment's notice?
As for Bob, he's still with his accountant,
and in the same investments that brought his portfolio
down. He's hoping for a miracle recovery. As of this writing,
the stock market is engaged in something of an upswing
and Bob, I'm sure, is getting his hopes up that he will
recover some of his losses. However, I shudder to think
that this rally may come to an end and the bear market
resumes. Where will Bob be then?
At 58 years old Bob is still playing
Russian roulette with his retirement. He's apparently unable
to make a decision to move to someone who has the ability
to make sense of market trends and the discipline to follow
the signals they communicate. This is a decision that will
have a profound affect on his financial future-and will
determine whether his story has a happy or sad ending.
© Ulli G. Niemann