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.
|
