What Is The Difference?

Ulli Uncategorized Contact

I am trying to politely turn a hateful comment regarding my post “Mutual Fund Fee Makeover” into a worthy response. The anonymous comment in question came from someone who in no uncertain terms stated his dislike for “dreaded” mutual fund managers or investment advisors for that matter.

The basic question was as to how a mutual fund manager differs from an investment advisor.

As I have posted before, mutual fund companies offer the investing public the opportunity to purchase an investment, which is clearly defined in terms of objective. Fund managers are expert stock pickers with large resources available to select those issues which they think will prosper best in the current economic environment.

It is a truly daunting task and any manager is only as good as his last call, which is why the average longevity of a manager is only around 5 years. This set up along with the mutual fund charter requires that an equity mutual fund itself has to be invested at all times, so that the product is available for sale to the public.

That in itself presents a problem in that this causes a commitment to be invested during bear markets as well. As we all know, holding any stock (or mutual fund that invests in stocks) in a bearish environment, will cause severe losses depending on the severity of the downturn. We have seen two major bear markets during the past decade with the result that most investors experienced negative returns.

Again, I respect what mutual fund managers are trying to do given the limitations of having to be exposed to the market at all times. I would not want that job, nor could I do it.

As an investment advisor, I make it my business to indentify the long term trends and attempt to stay in the market (mutual funds/ETFs) when it is trending up and out of it when it is trending down. Coupling this with a trailing sell stop discipline lets me control downside risk; this has resulted in the prevention of the brunt of the bear markets in 2001 and 2008.

By having a definite plan in place to enter and exit, I gain some means of control of my (and my clients) investments in an environment of many unknowns and much uncertainty. As we continue to slither along the dark side of this boom and bust cycle, we have entered unchartered territory where anything can happen at a moment’s notice.

In my view, not being prepared to deal with the inevitable consequences of this credit bust and enormous debt overhang will result in another serious portfolio haircut down the line. I for one am not willing to be part of it.

Contact Ulli

Leave a Reply