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THE "MUTUAL FUND MERRY GO-ROUND" PART ONE
IN THIS ISSUE:

1.  “Fund Of The Month” Club – Don’t Be In It.

2.  Chasing The “Hot” Funds – Not A Good Idea.

3.  The Dalbar Studies – Some Sobering Statistics.

4.  Why Most Of Us Have Bad Timing.

5.  Using Professionals To Manage Your Money.

Introduction

In January every year, the newsstands are filled with magazines and periodicals that want to tell you how to invest your money for the new year.  Ditto for the talking heads on the financial shows on cable TV. Everyone’s an expert in January, so it seems.  Most of these sources focus on mutual funds and how they did last year - which ones were best, worst, etc. – and, of course, their top picks for the new year.

It would be one thing if these media sources offered their mutual fund picks once a year in January.  Yet most of these sources offer new investment advice throughout the year.  In the case of the cable shows, they have new advice almost daily.  If you followed the investment advice in the financial media, you would be making wholesale changes in your portfolio almost every month!  I call it the “Mutual Fund Merry Go-Round” – buy this, sell that, ad nauseam!

In this issue, and more to follow in the weeks ahead, I will discuss why many investors are on the “mutual fund treadmill,” hopping from fund to fund to fund.  We’ll also see why many investors are continually chasing the latest hot-performing funds, only to be disappointed year after year.  I also call it “The Fund Of The Month Club.”

EDITOR’S NOTE:  If you are not an “investor,” don’t turn me off at this point.  Even if you are not an investor now, you will be at some point.  Or, your children, relatives and friends are (or will be) investors and could benefit from the information that follows. 

My Goal For You

I started this E-Letter in the weeks after the September 11 tragedy as a way to get timely information out to the several thousand investment clients I have all across America.  Last year, I was contacted by InvestorsInsight, who liked my E-Letter, and I gave them permission to send it to their subscriber base of over one million people.  This is how most of you reading this were introduced to me.

My goal for you is simple: I want you to be better informed after you read me than you were before – whether you agree with me or not – especially when it comes to your investments. 

As an Investment Advisor for the last 25 years, my ultimate hope is that one day you pick up the phone and call us and become one of our many clients.  But even if you never do, I hope to make you a smarter investor, wherever you keep your money.  With that in mind, let’s jump into this week’s topic.

The “Mutual Fund Merry Go-Round”

I subscribe to a lot of investment and business related magazines and periodicals, plus I watch the financial shows on cable TV.  Every January, these sources report the mutual fund performance results for the prior year; they “slice and dice” the fund performance in various and different ways (best, worst, etc.). And they also make recommendations for where to put your money now.

You see the headlines every January: “Where To Invest Now,” “Which Funds To Own In 2003,” “Top 10 Mutual Funds,” and on and on.  The newsstands are full of magazines like this in January, and the cable programs trot out countless “experts” with their advice on which funds (or stocks) you should buy for the new year.

The problem is, almost all of them recommend that you invest in DIFFERENT FUNDS every year and some even more frequently!  Yet at the same time, they tell us we should be “long-term investors”!!  How can anyone be a long-term investor when we are advised every year, every quarter and even every month to invest in the latest hot performing funds?  Because there are so many mutual funds (over 14,000 in the US alone), the top performing funds are rarely ever the same in any given time period.  Many investors end up switching from fund to fund to fund throughout the year as a result of all the conflicting advice.  It’s a mutual fund MERRY GO-ROUND!

Even worse, these publications and shows rarely analyze how you would have done if you followed their previous advice.  The reason for this is simple: they don’t have to.  Since these publications don’t sell securities, they don’t have to register with the regulatory agencies, and as a result, they are not required to give specific past performance information.  So they usually don’t.  Basically, it’s BUYER BEWARE.

Chasing The “Hot” Funds

Various studies have shown for years that the “average mutual fund investor” does not make what the mutual funds make.  Let me explain.  If you bought and held a mutual fund for five years (with no additions or withdrawals in the account), then you would make exactly what the fund made over that period.  If it made 50% over that period, and you held it the whole time, then you would make 50%.  But most investors don’t buy and hold a fund for five years, or even 2-3 years.

Most investors are on the Mutual Fund Merry Go-Round.  They buy and sell their mutual funds (or stocks) frequently, often several times a year, and usually because they get so much conflicting advice in the media and elsewhere.   They are continually chasing the latest “hot funds.” 

The problem with chasing the latest hot funds is that they can go cold – or lose money – just as quickly as they got hot.  Many investors buy hot funds only to see them under-perform or lose money.

Sometimes funds are the victims of their own success.  Being one of the “hot” funds attracts a lot of investor money.  Some funds grow so large that the manager and/or the system can’t continue to produce the big returns, and may even lose money.  There are several other reasons why hot funds can go cold in the future.

The Dalbar Studies

One of the most widely followed sources for this kind of information is Dalbar, Inc., a market research firm in Boston.  Periodically,Dalbar publishes a study which shows what the average stock and bond mutual funds made (performance) versus what the average investor in those same funds made.  The results are surprising!  To illustrate, I will use a good period in the stock markets.  The following numbers from Dalbar represent diversified stock mutual funds, which tend to track very closely on average with the S&P 500 Index, and bond/fixed income funds, which tend to track closely with the long-term Government Bond Index.  Read these numbers closely.

In the period from 1984 to 2000, the S&P 500 Index gained 16.3% on average per year; however, the average investor in stock mutual funds gained only 5.3% on average during that same period.  Surprised??

In the same period, 1984-2000, the long-term Government Bond Index gained 11.8% on average per year; however, the average investor in bond mutual funds gained only 6.1% on average.  

The problem is, most investors jumped around from fund to fund during that period, often buying high and selling low.  Yes, the investors who bought the average stock fund(s) and/or bond fund(s), and held them for that entire period, made roughly what the market indexes made: 16.3% on average for stock funds and 11.8% on average for bond funds.  But most investors didn’t.   Due to bad timing, they didn’t make nearly as much as the average funds.   And this was during the greatest bull market in history for stocks!

Shocked! . . . . Or Does This Sound Like You?

In the case of stock mutual funds, the average investor made less than a third of what the funds made on average.  In the case of bond funds, the average investor made only about half what the funds made.  I don’t know about you, but I was shocked when I first began to look at Dalbar’s (and others’) numbers on this in the early 1990s!  I had no idea that investors, as a group, were jumping from fund to fund to fund so frequently, and with such disastrous results. 

Does this sound like you?  If it does, don’t be embarrassed.  Here’s why.

Lousy Timing

I have lousy timing!  Yep, there I said it.  And I’ve been in the investment advisory business for over 25 years.  Actually, I haven’t tried to time the markets for over a decade, but I bet if I did, my timing would still be lousy.

My observation in dealing with thousands of investors over the last 25 years is that most people do not have good timing when it comes to the markets.  We have a tendency to buy things when they are hot, not when they are cold.  In most cases, it should be the other way around.  While the media is certainly a willing accomplice along this line, we are all influenced by greed and fear, at least to some extent.

As noted above, I have thousands of investment clients all across America.  Most are “accredited investors,” meaning that they have net worth  of at least $1,000,000 (not counting their home, autos, etc.).  In all these years, I don’t remember a single client telling me that they made most of their wealth from their investments.  No, in most cases, they became wealthy as a result of their primary business or occupation.

If you have a successful business, you know that it took a lot of hard work, a lot of experience and a lot of good decisions.  Investing successfully is no different!  I have never understood how prosperous businessmen and women think they can be successful investors right off the bat, without hard work and experience.  The Dalbar numbers above certainly indicate that most investors are not getting the results they hoped for!

Using Professionals To Your Advantage

I am a firm believer that most people would be better off if they used professional money managers to direct their investments.  The Dalbar numbers above, and similar studies, certainly back me up. Specifically, I am talking about Registered Investment Advisors and professional fund managers.  There are successful Investment Advisors, with proven performance records, that can direct your investments in stocks and bonds and mutual funds and other areas. 

Many people think you have to be “wealthy” in order to access successful money managers.  Some might tell you that, but the truth is, there are some very successful Investment Advisors who will accept accounts as small as $15,000-$50,000.  You don’t have to be a millionaire to have your portfolio managed by a successful professional.

There are thousands of Registered Investment Advisors in the US.  Some specialize in selecting individual stocks; some specialize in stock mutual funds; and some specialize in bonds and/or bond mutual funds.  They determine the stocks, bonds and/or mutual funds – out of thousands - to be in, and when to be in them.  You get to continue to focus on your primary business or your retirement or whatever you wish, while your professional money managers are intensely focused on the markets and making you money.

How Do You Find The Good Ones?

As in any field, there are good Investment Advisors and there are bad ones.  The key is finding the former and avoiding the latter.  Finding a handful of really successful Investment Advisors out of thousands around the country may seem like a daunting task.  It is, but there is some good news.

Most large brokerage firms have a list of Investment Advisors they work with and information about their past performance.  But in some cases, the brokerage firms only recommend those Investment Advisors who invest in their products or clear their business with the firm.  In this case, there may be a conflict of interest issue.

There are also several database services you can subscribe to which include information, and in some cases rankings, on Investment Advisors.  In addition, there are a few newsletters which track Investment Advisors.  These databases and newsletters tend to be fairly pricey, however.

Do Your “Due Diligence”

As noted earlier, there are good Investment Advisors and bad ones.  Once you find an Investment Advisor, you need to make sure they are what they claim they are.  It is absolutely essential that you: 1) verify their past performance record; 2) examine their system to see if it works in different market environments; 3) check out their operation and “back office”; and 4) check for regulatory problems, etc.

These are just a few of the things that should be verified and examined before you place money with an Investment Advisor.  In PART TWO of this series, in the next week or two, I will discuss in more detail how you go about verifying that an Investment Advisor is for real, and whether or not you should place money with them.  

Fortunately, there are a number of independent investment firms, such as mine, that are free to research and recommend ANY Investment Advisors and/or fund managers that we choose.  And, we conduct the due diligence on the Investment Advisors we recommend, so that our clients don’t have to go to that considerable expense and trouble.

“Mutual Fund Merry Go-Round” – PART TWO

The point I hope to have made clear in this issue is that most people would get better investment results by using professional money managers, rather than trying to pick stocks or mutual funds on their own.  Either next week or the week after (depending on what’s happening in the world), I will continue this discussion on Investment Advisors, with more information on how you find them and check them out. 

If you don’t want to wait for PART TWO, you can go to the ProFutures website where you will find a great deal of valuable information on Investment Advisors.  Or, as always, you can call us at 800-348-3601.

Wishing you a profitable year,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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