Protecting Your Capital

By Al Thomas

Every Wall Street analyst, financial planner and broker will tell you that the right way to pick a mutual fund is find a good money manager of a fund that has a long time record.

Yes, I believe that too, but it is amazing that when you go back in time to see what these geniuses did with their mutual funds, you will find years that had terrible losses. Who would want to own any of those funds then?

In the year 2008 about 90+% of all mutual funds declined. Many had losses of 30%, 40% and many over 50%. That is when they tell you things like: "you have to be in for the long haul", "this is only a market correction" and "the market always comes back". Among others.

One of the best-known mutual funds, Fidelity Magellan, dropped from a high of 146 to 100. That is a 32% loss. Yet this fund manager received a salary of over a million dollars. Did you know the average fund manager made $290,000 last year? How can that kind of money be paid to a person who loses your hard-earned cash?

The great majority of fund managers today have not experienced a long-term bear market. They are too young. A few of them did go through the 1987 crunch in which the bottom was reached in 3 weeks. They did not have a chance to sell off their weakest stocks. Of course, they had plenty of time before that fateful 508-point one-day loss to unload some of their dogs. Unfortunately, fund managers are not taught to sell and they definitely do not understand that sometimes cash is the best position.

A major fallacy of mutual fund charters is that they must always be fully invested. There are many funds that have specialties such a Emerging Market, Russia, China, real estate, indexes of various kinds, socially responsible, big cap, small cap and on and on. There are times when almost everything in that sector is going down. There is nothing to buy, but the fund charter maintains they must be fully invested. In defense of the fund manager he must buy even if it is a loser. He is not allowed to preserve the investors’ capital by staying in treasury bills.

If you think a fund manager who loses 30%, 40% or more of your money at any time is a good fund manager then you have been bamboozeled by Wall Street. There is only one way to protect yourself from that type of money mismanagement. It is very simple. If the fund you own drops more than 15% from its highest price any time after you own it you sell it immediately even if there is a sales charge or redemption fee.

The first rule of investing is "protect your capital". You even have to protect yourself from "a good fund manager".

Copyright 2013 Williamsburg Investment Co. All rights reserved. Al's new ebook (32 pages) is available on Amazon.com for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learn one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. The title is Never Lose Money In The Stock Market Again.