Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Chapter 17. On Technology: To What Avail?

Let's begin with a mutual fund fable based on fact. On May 23, 1996, an increasingly typical sort of mutual fund investor completed his daily review of his 15-fund, $150,000 mutual fund portfolio on his Quicken computer program. Our investor was sure that he was missing out on too much of the action in the stock market. Over America Online, he learned that "The Motley Fool" crowd thought that hot stocks were the way to go, and he decided to switch his money market fund investment of $10,000 into a hot new "momentum" emerging growth fund.

He noted as he browsed the web site of the no-transaction-fee mutual fund marketplace he used for trading his funds that this hot fund was up 60 percent in its first year. Its portfolio manager had run another fund with great success, and, by spending some of the advisory fees the shareholders of his new fund had anted up to be listed in the marketplace, had already attracted more than 100,000 investors and nearly $1 billion of assets. The manager was lionized in the press and on television, and would soon be the star of the Morningstar annual conference in June. A quick check of the Morningstar web site enveloped our investor with all the data he could imagine about the portfolio manager's earlier strategies, including his 10 favorite stocks, the key components of a portfolio with a price–earnings ratio of 45, a median market capitalization of $700 million, a concentration of 53 percent of assets in technology ...