Tags: Investing | long | term

A Great Way to Lose Your Shirt

Thursday, 27 Mar 2008 02:35 PM

Most investors have been led to believe that they should always use a "buy-and-hold" investment strategy and invest for the long-term when participating in the financial markets.

This strategy was popularized during the 1980s by investment managers of big mutual fund companies in an effort to persuade current fund shareholders to add to their accounts and to attract new shareholders to those funds.

I'm not suggesting some type of conspiracy theory, but one cannot argue with the fact that mutual fund investment managers have a significant reason to recommend a "buy-and-hold" investment strategy. Namely, their investment management fees are determined by the total assets of the funds they manage.

As a result, the larger a mutual fund's asset value, the more money the fund's manager gets in any given year.

Mutual fund investment managers also have convinced most investors that trying to time the market is a foolish endeavor because, again according to them, "no one can time the market."

One thing is certainly true: Fund managers are awful at market timing. The investment performance of most mutual funds proves this point. Approximately 85 percent of all mutual funds under-perform a broadly diversified portfolio of securities such as the S&P 500 Index in any given year.

Of the 15 out of 100 mutual funds that do outperform the S&P 500 Index in any given year, those tend to generate market-beating results for only two consecutive years. You'll rarely, if every, hear a mutual fund manager admit this fact.

Quite the contrary, mutual fund investment managers spend millions of dollars every year on marketing campaigns in an effort to persuade individual investors of the opposite case, that the expertise of the fund manager is required in order to properly allocate assets and to "navigate difficult times in the investment environment."

If that advice is worth anything, why do so many of them manage to miss the mark, over and over?

Now, let's turn to the concept of trading.

I recently heard the CEO of a major investment-banking firm say that he knew many rich investors, but that he had never met or heard of a rich trader.

That highly paid CEO is grossly overpaid and should be fired, due to his tremendous ignorance or because he is telling investors a bald-faced lie. I can name many rich traders — George Soros, Julian Robertson, Bill O'Neil, Paul Tudor Jones and James Simons, to name just a few.

Please don't get the impression that trading in and out of securities on a daily or weekly basis will produce better investment results than a buy-and-hold strategy — it won't. Although all of the names mentioned above are either multi-millionaires or billionaires, most ordinary investors would have an extremely difficult time trying to replicate the investment performance of those talented traders.

Fund managers can't do it, and most people have much less experience and resources than even a mediocre fund manager, frankly. And it's hard, very hard.

So, how should one approach the financial markets? If a buy-and-hold strategy is expensive, and trading strategies are risky, how does one produce consistently high-performing investment results?

The answer is really quite simple — do what works for you, and use a strategy you are comfortable with. That could be something as plain vanilla as a low-cost fund that tracks a major index.

Or, if you are more hands-on, you can follow along with an experienced hand and learn the market signals that serve your interests best, no management fees included.

First, decide whether you're a conservative or aggressive investor.

Then, if you'd like to be kept informed about important factors and developments that will affect stock prices during the coming months, consider a trial subscription of my monthly investment newsletter, The ETF Strategist, Click here now.

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DavidFrazier
Most investors have been led to believe that they should always use a "buy-and-hold" investment strategy and invest for the long-term when participating in the financial markets. This strategy was popularized during the 1980s by investment managers of big mutual fund...
Investing,long,term
626
2008-35-27
 

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