Trading isn't the way to wealth

Staying Ahead

September 15, 1997|By Jane Bryant Quinn

INSTEAD OF BUYING them and holding on, today's investors seem to be trading mutual funds.

That's not the way it used to be. Back in the 1960s and 1970s, only 9 percent of equity fund shares were sold or exchanged each year, says John Bogle, founder and chair of the Vanguard Group in Valley Forge, Pa.

The average investor held a fund for around 11 years. Now, investors want action. The annual turnover rate is running at 36 percent. Holding periods have tumbled to just over 2 1/2 years.

What were devised as long-term investments are being flipped around like a pack of cards, Bogle says.

Mutual fund managers are no better. In 1965-1971, "the go-go years," fund managers traded 40 percent of the stocks in their portfolios annually. Last year, their average turnover rate was 91 percent.

"Whatever happened to long-term investing by professional managers?" Bogle asks.

One reason we're trading so much is that technology makes it possible. With a telephone call or a mouse click, you can jump out of one fund and into another.

What's more, trading can appear to be entirely cost-free. You aren't taxed on your profits, if you're playing with a tax-deferred retirement account. With no-load funds, there aren't even any sales charges to give you pause.

Trading has a cost, of course. The funds have to administer all these jack rabbit accounts. The price appears in the fees the mutual funds impose. But who cares about paying 1 percent in overhead, when the market is flying up so fast?

Another reason we trade is that we know so much -- or think we do. Any hour, night or day, we can track the market on the Internet, screen for the best performing stocks or funds, print out pages of data and check what a thousand gurus say. And we can get the same stuff from investment magazines. But can we make sense out of this slag hill of facts? Probably not. Information isn't knowledge, Bogle says, and knowledge isn't wisdom.

Alan Abelson, columnist for Barron's investment magazine, writes that investors' IQs rise exponentially as their stocks rise arithmetically. Another 1,000 points on the Dow and we'll be a nation of geniuses.

Something else that tempts us to trade is the Balkanization of funds. Traditionally, they owned a cross section of the market, so that we amateurs could easily share in long-term economic growth.

Today, however, many funds choose to invest in just part of the market: big firms, small firms, micro firms; individual industries or countries; value, growth or quantitative investment styles.

vTC Our favorite funds are those that have gone up a lot. For that, we turn to Morningstar, the mutual fund tracker. Morningstar assigns stars to funds, reflecting their risk-adjusted performance over three years or more. The funds with the best records rate five stars; those with poor records rate just one.

Last year, 90 percent of the money that flowed into rated equity funds went to those boasting four and five stars, Bogle says. Another $50 billion flowed into those too young to rate (but probably with red-hot returns).

Five-star funds are undoubtedly better than one-star funds, but on average they haven't beaten the market over the past three years.

So to what avail all this activity? There's absolutely no evidence that it improves investors' long-term gains. More likely, it's hindering your returns.

"Inactivity strikes us as an intelligent behavior," says Warren Buffet, the famous investor. In other words, buy and hold for the long term.

Pub Date: 9/15/97

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