The Growth Fund Investing Myth

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Buy, Hold, and Lose? What mutual fund managers won’t reveal.

Mutual fund investments and growth funds are a lucrative business. Regardless if the economy is bull or bear, the investment broker will usually tell his clients to keep investing. In good times he will point to previous performance to solicit funds, in bad economic times he will say the market is undervalued and what goes down must go back up.

Is this ideology true? Should the saying be ‘buy, hold, and prosper’ or ‘buy, hold, and lose?’

Mutual Fund Investment Broker versus Active Growth Fund Investor

A simple case study will prove which method is more profitable. The investment broker will buy and hold a random mutual fund, and the investors will buy and sell the fund based on market conditions. They buy the AIM Basic Value C (GTVCX) fund at the beginning of 2005 for the price of 30 dollars. The challenge will conclude on October 5th 2009.

The investment broker holds during good times and bad.

The growth fund investor decided to employ one simple strategy. If the fund fell more than a few percent below its 350 day moving average he would sell. If the fund rose above the 350 day moving average he would buy and hold.

How did this investor fare?

Mutual Fund Investment Outcome

While the investment broker lost 42.6% of his portfolio to the buy and hold strategy, the more flexible investor netted a 10% increase during the same period of time. Are these results typical? Unfortunately yes. Even factoring in the percent or two lost in transaction fees as represented by the ‘front end load,’ the growth investor who bought during up trends and sold during down markets came out far ahead.

Does this mean every person buying mutual funds should actively manage their portfolio? Not necessarily. If the wealth manager were to actively manage the investors’ fund with hedging techniques for bad markets this may suffice. On the other hand, a lazy manager might encourage wanton spending regardless of the economic climate, and this would be devastating.

The Active Growth Fund Investor

Many investors prefer to manage their own funds actively. This requires due diligence, learning, and practice. The financial rewards, however, will more than compensate any time spent.

What other methods exist for determining a bull or a bear market besides following the 350 day moving average? At Investors.com, William J. O’Neil has an excellent method of determining market sentiment by following the flow of institutional money. Other methods rely on trend following indicators.

Whatever the method an investor uses, or even if he chooses to have someone else manage his mutual funds, understanding market forces will help him make better decisions with mutual fund and growth fund investing.