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What Individual Investors Need to Do To Avoid Being Affected by Wall Street’s Latest Scandal

The mutual fund industry has recently been accused of allowing prohibited trading to occur. This type of trading increases the expenses and lowers the return of the mutual fund, but there are steps an individual investor can take to ensure their returns aren’t affected.

Seattle, WA (PRWEB) October 6, 2003 – There’s another scandal on Wall Street, but this time there are steps you can take to avoid being affected by it according to Rex Jacobsen, Sr. Editor of BeatTheStockMarket.com, an online investment newsletter.

Recently, New York Attorney General Eliot Spitzer has settled with hedge fund Canary Capital Partners for allegedly engaging in prohibited trading tactics (market timing and late trading). Several other funds also have been implicated.

These activities are prohibited because market timing’s rapid-fire trading increases the expenses of the fund. These expenses are then paid by all of the fund’s investors, not just those that are profiting from the market timing activities. Technically, market timing is not illegal, but is prohibited by many mutual funds.

Late trading, on the other hand, is illegal. If you buy shares of a mutual fund before 4:00 p.m. EST, you pay that day’s closing price. If you buy them after 4:00 p.m. EST, you get the next day’s closing price. If positive breaking news for tech stocks comes out thirty minutes after the markets close, wouldn’t it be nice to be able to buy a tech fund at the 4:00 p.m. price so you can sell the shares immediately when the market opens? That would guarantee you a tidy profit, but such activity, known as late trading, is illegal.

Despite publicly prohibiting market timing and late trading, mutual funds have been accused of not only privately allowing such activity to occur, but they have also been accused of loaning $300 million to facilitate the prohibited activities. Why would a mutual fund allow this to occur? Because their bottom line profits from the loan, the increased asset base, etc.

So while the large investors are granted privileges that small investors are not allowed, the loyal long-term investors pay in the form of higher trading costs and a lower return.

“There are several things individual investors can do,” says Rex Jacobsen, Sr. Editor of the online investment newsletter BeatTheStockMarket.com. “The easiest way to avoid the problem is to invest in stocks. While we recommend both individual stocks and mutual funds to our subscribers, we have leaned toward stocks ever since discount brokers like Brown & Company have lowered their commissions to $5 per trade. This allows most investors to easily and economically build a diversified portfolio of stocks.”

Jacobsen also points out that for investors that prefer mutual funds over individual equities, there are ways to avoid getting stuck with mutual funds that may be secretly allowing prohibited trading activities. He recommends using low-cost index funds or exchange traded funds that track the S&P 500 and other indexes.

“If instead of index funds you prefer actively managed funds, then there are a couple of things to look for,” says Jacobsen. “First, ensure that the fund has an expense ratio that is lower than the average for that type of mutual fund. It’s important to compare similar funds since certain types, such as international funds, inherently have higher expense ratios.”

“Next, look for funds that charge redemption fees for investors that withdraw their funds within 90 days. This will discourage timers from jumping in and out of the fund, thereby driving up expenses that you have to help pay.”

”Finally, remember that investing is a long-term process,” says Jacobsen, “so don’t panic and jump out of the stock market every time a scandal is exposed or the market dips. Ensure your portfolio is diversified and ride out the bumps.”

For additional information, visit www.BeatTheStockMarket.com which publishes an on-line investment newsletter.

CONTACT INFORMATION:
Nancy Wagner
Media Representative
nancy@cuttothechasemarketing.com
425-415-6427
http://www.BeatTheStockMarket.com


This article may be re-published as long as the following resource box is included at the end of the article and as long as you link to the URL mentioned in the resource box:

Article by Rex M. Jacobsen, Sr. Editor of the investment newsletter Beat The Stock Market.com. Since 1998, the company's model portfolio has achieved a return of 31.9% per year. The company's web site can be found at http://www.BeatTheStockMarket.com.

 




 

 

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