Market Timing Of Mutual Funds May Become Extinct
- Alan Lavine and Gail Liberman
If you use market timing to invest in mutual funds, your days may be numbered.Due to all the bad news about market timing, mutual funds could place more restrictions on trading. Don't be surprised if mutual funds limit the number of trades an investor can make and/or impose stiff or stiffer redemption fees than they do currently. Perhaps you already have noticed redemption fees on your mutual funds based on shorter time frames.
There's been a lot of controversy lately about market timers who made big profits by trading international stock funds over short periods. The Securities and Exchange Commission is scrutinizing a number of mutual funds that permit market timers to trade their funds. Sources told me that 80 mutual fund groups are under investigation. The reason: The mutual funds' prospectuses say the funds limit market timing, but in reality, timing may not be limited. Market timing investments take many forms. The most recent controversy involves international stock funds. The foreign stock markets close hours earlier than the U.S. markets. So when a stock in a foreign market plunges, but news later in the day indicates it will rebound the next day, the market timer invests in the U.S. fund before 4 p.m. The next day, when the foreign market rises, the timer takes a hefty profit out of the fund. This robs the remaining fund investors of profits.
There are other types of market timers that use price trend or economic indicators to trade funds. Some investors use moving averages to move in and out of mutual fund investments. They look at the 200-day average share price of the fund and compare it with the current price. If the current price is above the 200-day average share price, it is a buy signal. A current price below its 200-day average price is a sell signal.
Typically, if you use a long-term moving average, you will make just a few trades a year. A moving average is a systematic way to get out of a fund when it is declining. It can help you get out of a bear market, and get you back into a bull market.
Are you using some type of system that makes a few trades a year? If so, check with your mutual fund to make sure it is permitted or that you will not be subject to stiff fees.
If you truly like rapid fire trading, consider Exchange Traded Funds (ETFs). Exchange traded funds trade continuously on the stock exchange during the day. They, too, represent a basket of stocks, such as the S&P 500. But beware. These funds may be particularly volatile because they're traded daily by large institutional investors. Plus, you pay a commission on trades.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).
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