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CNN Live Sunday
Should You Pull Your Money Out Of Mutual Funds
Aired November 09, 2003 - 18:41 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: So, should you pull your money out of mutual funds and stuff it in a mattress? Jim Clash is with "Forbes" magazine and is joining us from New York to talk about the scandal. Jim, what do you think?
JIM CLASH, "FORBES" MAGAZINE: Carol, I really think that right now investors should hold on even in the tarnished funds. As your piece just pointed out there are a lot more consequences to selling now. It's been a really big up market this year. We're up 20 percent on the S&P, 48 percent on the NASDAQ. To sell now in a taxable account you would pay incredible capital gains taxes.
Also, as you say, there are some - some of these funds have back end load. You'll pay two percent of your loads. The reality is that I looked at Strong funds. Dick Strong was accused of $600,000 worth of illegal trading, profiting on that. If you amortize that over all the strong funds that would have come out to about $2 per $100,000 invested by investors so, you know, don't cut off your nose to spite your face.
LIN: But isn't that a little bit like the thief steals your money and you don't even try to call the police?
CLASH: Well, look, you know you should be smart about it. You look at ways. Maybe you wait until the end of the year. You figure out how to do this. If you have the money in a tax deferred account like a 401K or an IRA it's easier to trade funds but there are too many risks now.
You got the task risk also with the market going up. Heck, I think on September 16th I think the S&P was up 1.6 percent. Had you been in cash and sold your fund you'd have lost 1.6 percent versus if you'd have had it in the fund.
So, again, investors should not overreact. I think what Eliot Spitzer is doing is great and the SEC now on his heels. These guys really shouldn't be allowed to trade intra day when the investors can't but, at the same time, investors should look at all the things that could happen, all the things that could make them lose more money.
And the other thing is you want to hold the fund now. The SEC and Spitzer are going to make these guys pay fines. They're going to have to put that money back into the fund. Perhaps the shareholders should hold on because then they'll get the money back.
LIN: And mutual funds, actually the price of a mutual fund in after hours trading, I mean how is that affected compared to an individual stock? They move differently don't they?
CLASH: Oh, it's very different. I mean a mutual fund is a basket of stocks. The average is more than 50 per portfolio so, you know, if one stock has a big disappointment in earnings or something it's not going to affect the portfolio as much as if you own that particular stock.
Again, investors should not panic. They should realize that mutual funds are not stocks. They don't trade on the exchanges that the NAV price is based on all the underlying securities in that basket and that a scandal or something like that isn't going to affect the price of their shares.
LIN: Right. So how should people then go forward in picking mutual funds at this point?
CLASH: Well, at "Forbes" we're always conscious of expenses and the other thing that's important here is a lot of these fund families like Fred Alger Management, Strong Funds, Putnam, these are very expensive families. They have loads on a lot of their funds. Their annual expenses are above $1.50 which is way above average. They probably shouldn't be in these funds in the first place.
We at "Forbes" tell people to look for good funds with low expense ratios. That means that management is taking a low percentage of their returns every year that are no load. You don't have to pay an upfront broker to buy the fund and long term you're going to do a lot better in one of those funds.
LIN: All right.
CLASH: And some of the families are Vanguard, Fidelity, you know those are two great fund families with low cost funds.
LIN: Yes. OK, so I hear you're saying stick to the fundamentals and look at your cost basis and control your cost and hold on for the ride.
CLASH: Yes, don't overreact.
LIN: Thanks so much, Jim. Yes, don't overreact.
CLASH: Yes, it's easy to but don't.
LIN: OK, thanks very much, Jim Clash of "Forbes" Magazine.
CLASH: Thanks, Carol.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
Aired November 9, 2003 - 18:41 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL LIN, CNN ANCHOR: So, should you pull your money out of mutual funds and stuff it in a mattress? Jim Clash is with "Forbes" magazine and is joining us from New York to talk about the scandal. Jim, what do you think?
JIM CLASH, "FORBES" MAGAZINE: Carol, I really think that right now investors should hold on even in the tarnished funds. As your piece just pointed out there are a lot more consequences to selling now. It's been a really big up market this year. We're up 20 percent on the S&P, 48 percent on the NASDAQ. To sell now in a taxable account you would pay incredible capital gains taxes.
Also, as you say, there are some - some of these funds have back end load. You'll pay two percent of your loads. The reality is that I looked at Strong funds. Dick Strong was accused of $600,000 worth of illegal trading, profiting on that. If you amortize that over all the strong funds that would have come out to about $2 per $100,000 invested by investors so, you know, don't cut off your nose to spite your face.
LIN: But isn't that a little bit like the thief steals your money and you don't even try to call the police?
CLASH: Well, look, you know you should be smart about it. You look at ways. Maybe you wait until the end of the year. You figure out how to do this. If you have the money in a tax deferred account like a 401K or an IRA it's easier to trade funds but there are too many risks now.
You got the task risk also with the market going up. Heck, I think on September 16th I think the S&P was up 1.6 percent. Had you been in cash and sold your fund you'd have lost 1.6 percent versus if you'd have had it in the fund.
So, again, investors should not overreact. I think what Eliot Spitzer is doing is great and the SEC now on his heels. These guys really shouldn't be allowed to trade intra day when the investors can't but, at the same time, investors should look at all the things that could happen, all the things that could make them lose more money.
And the other thing is you want to hold the fund now. The SEC and Spitzer are going to make these guys pay fines. They're going to have to put that money back into the fund. Perhaps the shareholders should hold on because then they'll get the money back.
LIN: And mutual funds, actually the price of a mutual fund in after hours trading, I mean how is that affected compared to an individual stock? They move differently don't they?
CLASH: Oh, it's very different. I mean a mutual fund is a basket of stocks. The average is more than 50 per portfolio so, you know, if one stock has a big disappointment in earnings or something it's not going to affect the portfolio as much as if you own that particular stock.
Again, investors should not panic. They should realize that mutual funds are not stocks. They don't trade on the exchanges that the NAV price is based on all the underlying securities in that basket and that a scandal or something like that isn't going to affect the price of their shares.
LIN: Right. So how should people then go forward in picking mutual funds at this point?
CLASH: Well, at "Forbes" we're always conscious of expenses and the other thing that's important here is a lot of these fund families like Fred Alger Management, Strong Funds, Putnam, these are very expensive families. They have loads on a lot of their funds. Their annual expenses are above $1.50 which is way above average. They probably shouldn't be in these funds in the first place.
We at "Forbes" tell people to look for good funds with low expense ratios. That means that management is taking a low percentage of their returns every year that are no load. You don't have to pay an upfront broker to buy the fund and long term you're going to do a lot better in one of those funds.
LIN: All right.
CLASH: And some of the families are Vanguard, Fidelity, you know those are two great fund families with low cost funds.
LIN: Yes. OK, so I hear you're saying stick to the fundamentals and look at your cost basis and control your cost and hold on for the ride.
CLASH: Yes, don't overreact.
LIN: Thanks so much, Jim. Yes, don't overreact.
CLASH: Yes, it's easy to but don't.
LIN: OK, thanks very much, Jim Clash of "Forbes" Magazine.
CLASH: Thanks, Carol.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
