Say Goodbye to Your Fund Manager

Physician's Money DigestFebruary15 2003
Volume 10
Issue 3

f you're like many of today's physician-investors,your investor confidence could use aboost. That's why many are relying on mutualfunds to fulfill their retirement objectives. Andwhile this can be a good idea, putting your retirementaccount on mutual fund cruise control cansometimes mean a costly ride.


There are several advantages tomutual funds. Besides the fact that aprofessional picks the stocks, there is theconvenience of funneling a fixed dollaramount into the fund each month. Inaddition, investors get to select mutualfund goals that meet their individualrisk tolerance, as well as receive the benefitsa diversified portfolio provides. Somutual funds do indeed serve a usefulpurpose, especially for investors whocan only contribute a relatively smallamount to their retirement fund monthly.However, this investment vehicledoes have its share of flaws.

First, there's the cost of maintaininga mutual fund. Whether your fund is back-load,front-load, or no-load, there's a price. For example,no-load funds pay commissions, if there areany, through the management fee—there's no freelunch. Someone has to maintain the infrastructurethat supports the administration of the fund.And after the other expenses are paid, there mustbe a profit to reward shareholders who haveinvested in the company that sells the fund.

If the fund makes a profit, investors have to paytaxes on every cent its holdings make when sold.And they're sold often. Short-term performance isimportant to fund managers. Investors, however,don't have any control over what's sold or when.So, whether you think a stock should be sold ornot, you're going to be taxed when it is,if it makes any money. In addition, withso many stocks in these funds, you'll paytaxes every year (out of money earnedelsewhere). And the stocks you're countingon for building your retirement nestegg can't perform as well, collectively, asthe top 15 or 20 stocks.


But the face of mutual funds ischanging. Investors can now managetheir own mutual funds without havingto deal with some of these disadvantages.A new form of brokerage, calledfolio service, is now being offered. Usinga folio service, investors select a basketof stocks and, for as little as $150 a year,can make as many as 500 trades amonth. In addition, you don't have to buy a fixednumber of shares. You can invest a fixed amountand spread your purchases across the board. Youcan also use dollar-cost averaging in every positionyou hold, as well as regular portfolio balancing.

The Folio


According to Gene Walden, author of (Dearborn Trade; 2002), there arecurrently only 4 primary players in this emergingindustry. These include: FOLIOfn (, ShareBuilder Inc (, (,and PortfolioBuilder (www.portfoliobuilder).These companies offer investors about 4000stocks, which represent 95% of the regularly tradedstocks. They're able to offer investors low ratesbecause of window trading (ie, trading in bulk atfixed times). And, depending on which companyyou consider, they offer windows as often as twicea day or as infrequently as once a week.

Using the folio method, investors can pickexcellent stocks, invest their dollars regularly, automatically,or electronically, and hold the companiesas long as they're producing earnings at a good,steady rate. This is ideal, since you're taxed on thegains only when you sell. So long as you buy at areasonable multiple price/earnings ratio and theunderlying company continues to generate earningsat an acceptable rate of growth, there's no needto sell. You will, however, need to check at leastonce a quarter to make sure that the earningsgrowth for which you bought the stock is still there.

There's software on the market today that canhelp you select quality companies at a good price—and can watch to make sure that they stay on track.So, if you're looking to make your financial life simpler,this may be the right choice for you. The foliomethod puts you in charge of your mutual fundsbut doesn't require that you devote your valuabletime to stock research and homework. You get theadvantages of being the boss without the usualdemands. In addition, the performance of yourown mutual fund should improve so that at least4 of every 5 stocks are winners.

Ellis Traub, author of

Take Stock: A Roadmap

to Profiting from Your

First Walk Down Wall

Street (Dearborn; 2000),

is chairman of the

Inve$tWare Corp (, manufacturers

of stock

analysis software. He

welcomes questions or

comments at 954-723-9910, ext 222 or

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