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 clients made.
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 Representative’s license.
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 were non-existent.)
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 Niemann is an
investment advisor and has been writing about objective, methodical approaches
to investing for over 10 years. He eluded the bear market of 2000 and has
helped countless people make better investment decisions. To find out more
about his approach and his FREE Newsletter, please visit:
www.successful-investment.com.
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