Understanding Stocks

182 UNDERSTANDING STOCKS
mutual funds so that you don’t miss out on the best days. Although this
makes sense, you also want to avoid the worst days!)
You will have to experiment to determine what are the best days to
move. For example, some people who use this method don’t move on
Fridays. Others move only when the Dow is up a huge amount, at least
1.5 percent. Others move if the Dow is up at least 1 percent. You also
have to check European markets for any news that could affect the next
day’s stock prices. Finally, you need to carefully study which countries
your European fund is investing in.
What the Critics Say
Mutual fund companies don’t like market timers and will do everything
in their power to discourage timing strategies. Many of them penalize
traders with taxable accounts by tacking on 1 percent penalties if they
notice market-timing tactics. [It’s also possible that in the future mutual
fund companies will tack on penalties if you use this strategy in your
401(k) or 403(b).]
Critics contend that this strategy punishes long-term investors in
foreign mutual funds. Jason Zweig wrote in Money magazine that in
just a few years, short-term mutual fund traders have transferred millions
of dollars ($420 million, according to him) from the accounts of
long-term investors to their own accounts. Zweig suggests that the
strategy, although legal, is unethical and should be stopped. Basically,
mutual fund traders are taking advantage of a loophole in the way
mutual funds are priced. Others might argue this is simply the capitalist
system at work. In the end, you have to judge for yourself whether
it is capitalism at work or unethical greed.
As you know from reading this book, mutual funds are supposed to
be long-term investments, not vehicles for short-term trading. That is
why market timing drives mutual fund managers crazy. They hate it
when you transfer money into and out of international funds. Therefore,
once they identify you as a market timer, it is likely that you will
no longer be allowed to use the strategy.
Although this strategy worked in the past, there is no guarantee that
it will work in the future. Just like other market timing strategies that
have worked before (e.g., the January effect), once too many people