I have had much success timing a particular mutual fund, over the last three years. It is so simple, you can read it like yesterday's news.

I probably do no more than 3 or 4 switches a year, but now my broker, TD WaterHose, says I must pay a 1% penalty if I switch in/out within any 90 day period. They say mutual funds are meant to be held for long term. Says who??? The fund doesn't care, as long as it is not more than a few times a year. I don't want to be restricted by their artificial rules.

Any discount brokers that you are aware of, which do not limit switches?

From: bylo@bylo.org
To: wk@.com
Subject: Re: Market timers are bad news for buy-and-hold investors
Date: Thu, 29 Mar 2001 07:39:18 -0500

Dear WK,

When people "market time" mutual funds they cause the funds to buy and sell shares of the stocks that comprise the fund. This incurs all sorts of costs to the fund, including brokerage fees and the effect of the bid/ask spread. These costs are passed to all fund unitholders, not just the traders. That's why most fund companies have taken steps (usually a 1% fee) to discourage this activity.

Most advisers and brokers (including discount brokers) who sell mutual funds (including all front-end load and most no load funds) receive trailer fee payments from the fund companies for each quarter that their customers hold their funds. The 1% fee that discount brokers charge for holding less than 90 days is to compensate them for not getting that trailer.

Finally, the frequent, heavy stock trading activity that market timers inflict on mutual funds results in capital gains to those funds. These capital gains get passed on to investors as distributions (all those T-3 and T-5 slips we've been getting) and are taxable in their hands. That means that buy-and-hold investors get to pay income tax as the result of trading activity caused by "market timers."

If you're looking for sympathy, you've come to the wrong place!

...Bylo

Update 06Apr01: A reader, KB, suggested that I should have mentioned ETFs as an alternative for those who want to trade index funds without incurring costs on everyone else. He's right. Now I have.