Art of fund-switching
Boston — The stock market is falling. Or is it? Interest rates are rising. Or are they? People who manage and invest in mutual funds are supposed to keep track of these things and know what they are doing. If stocks are up, money can be moved to an equity fund; if stocks are down (when, presumably, interest rates will be up), a switch can be made into the money market fund.
There is no foolproof way to time the market's twists and turns, and most people should probably not make major mutual fund shifts more than twice a year, but investment experts do agree that now looks like a good time to watch the stock and money markets closely.
Being able to switch among a variety of funds is supposed to be one of the advantages of a large ''family'' of mutual funds. Most of the bigger companies offer a toll-free telephone number to make the job even easier. The question reamins: When?
''There are no guidelines on switching,'' admits Sheri Kole, a financial analyst with the College for Financial Planning in Denver. There are many technically oriented investors who switch in and out of various funds several times a year, she notes.
Apart from watching fund performance records in newspapers, magazines, and the many fund newsletters that are available, there are two other ways to time switches: fund switch newsletters and timing services.
There are two primary players in the newsletter game, Switch Fund Advisory (Schabacker Investment Management, 8943 Shady Grove Court, Gaithersburg, Md. 20877, $75 a year, 3 months for $25) and Telephone Switch Newsletter (Fabian Financial Services, PO Box 2538, Huntington Beach, Calif. 92647, $89 a year, 6 months for $55). Both newsletters give recommendations about the best funds to use for market-timed switches and notify subscribers when it is time to move from one type of fund to another.
The publishers of both of these newsletters are also involved in timing services, which is the other main way to help ensure that a mutual fund investment keeps up with the times. There are several timing services, with minimum investments ranging from zero to $150,000.
Before doing business with one of them, you will have to put your money into a mutual fund company with a number of individual funds. The fund shares remain in your name, and you can withdraw any or all of your investment at any time. By signing a form, you give the timing service the power to switch money around within the fund group. You also pay whatever charge the fund imposes for each switch, usually less than $5.
For most timing services, the annual fees run about 2 percent of assets. Some may add an additional flat charge of $200 to $500 a year.
In addition to the Fabian and Schabacker services, a few of the services ranked highly in a recent Money magazine survey included Greenwich Monitrend Corporation (222 Bridge Plaza South, Fort Lee, N.J. 07024); PSM Investors (121 Judy Farm Road, Carlisle, Mass., 01741); Lowry Management Corporation (350 Royal Palm Way, Palm Beach, Fla. 33480); Schield Management Company (1610 Wynkoop Street, Denver, Colo. 80202); and Monitored Assets Corporation (2910 Westown Parkway, West Des Moines, Iowa 50265). All seven were able to yield at least an 18 percent compounded annual rate of return.
Another switching method, recommended by mutual fund expert William E. Donoghue, does not rely on timing, but simply requires one to keep track of current average yields for money market funds.
When 30-day money fund yields, as measured by the Donoghue average, are below 10 percent, people should be fully invested in a growth stock fund, he says. When the average is between 10 and 11 percent, 75 percent of the money should be in the stock fund and 25 percent in a money fund. With the average between 11 and 12 percent, the investment should be evenly split between stock and money funds. When the average is between 12 and 13 percent, the balance should be 25 to 75 in favor of money funds. And 100 percent should be in money funds when their yields are above 13 percent.