Friday, April 20, 2001
The Mutual Fund Wealth Builder: A Profit Building Guide for the Savvy Mutual Fund Investor
Money manager Dick Fabian has put together a system for selecting mutual funds that is based on timing markets, selling at apparent sector highs, buying when markets are rising, and, for all this, reliance on so-called technical indicators of market performance.
This advice ignores the high costs of trading, such as taxes on capital gains, yet contains some wisdom worth observing. Dollar cost averaging, the principle of putting constant amounts into assets regardless of market moves, is less efficient than buy low/sell high investing if investors can call market turns. There is no evidence that most investors can do this, but for those who want to try, it makes for keener investing.
Much of The Mutual Fund Wealth Builder is US-centric and of limited use to Canadian investors. But the advice to use enhanced index funds is useful. In Canada, funds that invest only in such things as Dog of the Dow (the top ten stocks of the index ranked by highest dividend yield) or the value component of the S&P 500 (the lowest cohort of stocks ranked bottom up by ratio of price to earnings per share) are available in mutual fund form from several vendors. They deserve attention.
Employing The Mutual Fund Wealth Builder's advice requires astute market timing. Investors who can pull off this trick should be able to profit handsomely. Other investors, who use a buy and hold strategy, may find that funds that soar one year tumble the next. This is an example of regression to the mean, a fancy way of saying that asset price fluctuations tend to cancel out over time. The investor is then left with long run returns to whatever asset class he chooses, less trading costs, taxes and management fees. The investor who buys a dumb as nails index fund or who diversifies among several stock and bond indices and leaves money in place is statistically likely to beat heavy traders. For the reader prepared to trade funds actively and to accept the attendant costs, The Mutual Fund Wealth Builder has valuable advice. But use it with care. Historically, the odds are against the investor who tries.