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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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October 2, 2003
"New Mutual Fund Advertising Rules from the SEC"
The Securities and Exchange Commission is worried that people are buying
mutual funds based on misleading advertisements in magazines, newspapers and
on TV. So, they have just passed a set of advertising rules that will be
phased in over the coming months that are supposed to give prospective mutual
fund shareholders a more complete and accurate picture of the mutual fund
they are thinking of buying.
Here are the highlights of the new rules:
- Funds will have to make available more current performance information
than they have in the past. Funds now can pick the time period they
want to advertise performance from, whether it be one year, 5 years or 10
years. The new rules specify that funds make available at a toll-free number
and Web site the most recent performance data through the most recent
month-end.
- Funds will have to highlight risks as well as returns. In the past, funds
have been able to trumpet huge returns and minimize perceived risks. New ads
will have to give a more balanced picture, showing that the funds can go
down as well as up and that past performance is not a guarantee of future
results. Fund will also have to explain clearly the fund’s investment
objective, such as growth or income.
- Funds will have to explain expenses more clearly. Fund ads will now have
to be more explicit about all kinds of charges and expenses that were hidden
or buried in the past. This includes sales charges, management fees,
12(b)-1 promotional charges and exchange fees.
The problem with many investors is that they are always chasing the most
recent performance winners. For example, at the peak of the Internet craze,
billions of dollars poured into technology and Internet funds because they
were showing returns of 100% or more. Those Johnny-come-lately investors
then got crushed when the Internet stocks cratered. In 2003, the same cycle
happened as people poured billions of dollars into bond funds because bonds
had been doing so well over the past 3 years as interest rates kept
falling. But when rates starting rising in June, investors in those bond
funds were socked with enormous losses.
So, the moral of the story is you should not buy a fund just because it has
impressive performance numbers in an ad. The new SEC rules will allow you to
get a closer look at the total fund’s offering, including expenses and risk.
When you buy a fund, look forward at what is coming in the markets -- and don’t
just be dazzled by recent hot performance.
For More Financial Tips From Jordan Goodman
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