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Stock Market News for October 2002

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Mutual Fund Managers are Supposed to Make Money
The American public-the average investor-is being taken for a ride by very highly paid mutual fund managers who don’t seem to know their job. These managers don’t seem to know that they are supposed to make money for the people who invest in their funds. They think its okay if they lose money.

The last two years have been challenging times for investors. The corporate accounting scandals of the past six months have compounded the confusion and frustration felt by many investors. It’s not as easy to make money in equities in general or in equity mutual funds as it was in the late 1990’s. However, that is the fund managers’ job. Obviously they need to work harder when the general market is down, but that’s what they get paid for.

Recently, fund managers invented style boxes, such as large-cap, small-cap, growth, value, blend, etc. Then they told us that if they stayed in their box and did as well as everyone else in that box, that meant they were doing okay. Do these boxes help investors? No. They are a cop out. Style boxes put the onus on the client or advisor to guess right, to know in advance what is going to make money and what is going to lose money. But that’s not our job. That is the fund manager’s job. It is our job to pick fund managers who know how to make money for investors.

There are no investors who a willing to gamble with their life savings. They don’t have to guess or “figure out” the future. All they have to do is keep track of what is happening today. William O’Neil, a wise investor and the founder of Investors Business Daily, recommends this approach: “Sell your stock if it drops 7% to 8% below your buy price.” Fund managers should use the same rule.

If the fund goes up as expected and hits a nice high, then starts to fall the manager should certainly sell it by the time it has fallen 20% below its peak. O’Neil suggests selling when a stock or mutual fund is 15% below its peak. If 10 stocks in a portfolio drop 20% from their high, the manager should sell all ten. If all the stocks are down 20%, they should sell all and hold all cash. We will thank them.

There are some good fund managers out there who make money for their investors. Check a fund’s performance for the last one-, three-, five-, and ten-year periods before you invest your money.

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