I have a rollover IRA in a large fund family and am trying to decide whether to leave it in the mutual fund or to roll it over to a broker and buy stock. Can anyone tell me what the pros and cons are of these two strategies?
With a rollover IRA in a large fund family, you can switch from one fund to another without tax consequences. You help pay the fund manager's salary. Is he earning it? If you roll it to a broker and buy stock, you will pay the broker a commission. Do you get advice? Do you want advice? Will you, with or without the advice of a broker, do a better job of picking stocks than the fund manager? If your rollover is relatively small, like under $50000, and certainly if under $10000, you probably are financially ahead to leave your rollover where it is, particularly if you are with a low-cost mutual fund company. If it is a big rollover, like over $150000, and you are quite adept at picking stocks, you may well do better on your own. A mutual fund manager must buy when people want shares of his fund, which is when the market has been doing well and prices are up. He must sell when prices are down. Janus is getting devastated. They got out of some long term holdings last year, people got big capital gains distributions and the shareholders must sell shares to pay their taxes. This forces the fund manager to sell to meet the redemptions. Within your IRA if you hold a good stock, you can decide to ride out the storm, as there are no immediate tax consquences to anything you do. The necessity of mutual fund managers to buy high and sell low is a major reason your chances of beating 'em are really quite good. You might, with a large rollover, roll just part of the money to a discount broker, manage it yourself, and compare your performance to that of the fund manager. Best wishes, Chris
Chris,A good fund manager is going to keep adequate cash reseves in the account for several reasons. One is to pay investors for shares redeemed and another is to take advantage of buying opportunities. I know of several funds that have 9 to 20 percent returns for 2000 yr end. Each of these funds held large cash posistion to avoid being forced to buy at the March peak and to avoid be forced to sell because of scared shareholders.If a person has the time, disciple and think they can to better consistently than the fund manager then they should consider investing into individual stocks. And maybe getting a job with one of the Mutual Fund companies as a fund manager.Michael
Some fund managers keep large cash positions when they THINK a lot of redemptions are coming. This is another piece of market timing. Historically I haven't found it difficult to beat most fund managers--but if I became one, I'd have the same problem they do--how to put large amounts of money into the market and take it out without causing a major move in the stock in question. Not easy. It isn't that I'm so smart, I just have my money to manage and there isn't enough to move markets, and I'm not so antsy as to sell every time the market has a hiccough. The current plight of Janus, now facing massive redemptions after large capital gain distrbutions is a case in point. People literally must sell their shares to pay their taxes, and the manager MUST sell to meet redemptions. Look at the weakness in the shares owned by mutual fund companies in the morning in past weeks. Or read the Peter Lynch books, describing his being faced with massive redemptions in the '87 fiasco. Being a mutual fund manager may pay very well but when you don't perform, job tenure is pretty iffy.... Best wishes, Chris
Yes, I agree. I was also thinking about rolling over into funds that hold only stock in specific sectors. For example buying into a health sector fund, a wireless communications fund, a pharmaceuticals fund, or whatever. With this strategy I don't have to do all of the painstaking research. But then, as you point out, I get stiffed with the capital gains as these managers buy and sell. An interesting dilemma!Thanks for the replies, Richard
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