Sunday, December 07, 2008

Conflit of Interest

This is my 499th post. So, I'll say something more serious. The topic is conflict of interest in the mutual fund industry.

What type of conflict of interest am I talking of? Well, during this bearish market, you still hear of dollar cost averaging.

The reasons given for dollar cost averaging are:
  1. You cannot be influence by the fluctuation in the stock prices.
  2. It is hard to determine to top and bottom in a market.
  3. A way to force you to safe.
Point 1 is partly true. Prices fluctuate within a certain range if you view them using daily time frame. No point to react to every movement because of the high charges in commission. But if you step back a little bit further and use the weekly time frame, then you can see that certain stock have strong uptrend and downtrend. To make money, you need to be able to catch the strong uptrend and to avoid the strong downtrend.

Now, this comes to point 2. It is of course impossible to catch the top and bottom, but it is still profitable if one can determine the bottom after 10-20% raise or the top after 10-20% drop. This is because, in a strong uptrend, the price can increase over 100%, sometimes 200-300%. If one can catch 60% of this move, you will already have a very good return. In a strong downtrend, the price can drop 50 to 80%. Thus, it is best to avoid them. Therefore, being able to draw a simple uptrend or downtrend line using a chart is really beneficial in maximizing ones profit.

For point 3, I think that saving should be part of your natural habit.

So, that 3 points are used to promote dollar cost averaging. But the real reason, based on the point of view of an asset management company is different.

It all comes down to profit. You see, the asset management company sucks a minimum of 1% of your asset every year. In a good or bad year, they are still able to reduce your asset. If they promote chart reading, imagine what will happen in a bear market? If everyone pull out they money, less asset under management means less profit! That is why, you always hear from fund managers "advicing" you to keep on investing in the market. They don't really put your priority as they priority. Their priority is to take your money first. Making profit means that they can attract more money for management.

Well, you can't blame the mutual fund industry for this behavior. They are business minded. The blame is really on you. If you choose to remain ignorant in this investment game, then you are a sucker and unless you change your attitude, you remain a sucker for life.

If you want to invest, you need to know the basics of fundamental analysis and technical analysis. This is a must. With this knowledge, you can put in tough question for your financial planner, your broker or the a representative of the mutual fund industry. If you don't ask, they will not tell you and the loser will be you.

So, go to MPH and increase your knowledge. We are experiencing a bear market now, so it is a good time to educate yourself to prepare for the next bull market.

1 comment:

Victor AY said...


No doubt dollar cost averaging is a very good and easy to understand method. One thing investor need to be aware is the fund performance is very much depends upon the fund manager team analysis and skill. What if half way thru the investment, the fund manager changes ? or worse case drop out of the 5 star Lipper/Morningstar rating ? Of course if time is your ally, that's a higher chance. Investor should evaluate their financial goals with their timeline in order to best achieve the return that you want. In some case, you don't want to dig a deeper hole if you want to get out of the mess.

My 2cents comment...