Friday, May 16, 2014

Stupid, Stupid, Stupid

T. Rowe Price blocked approximately 1,300 American Airlines employees from trading into their retirement plan mutual funds over the past three years due to excessive activity, according to Money Magazine. Some of the airline’s employees received lifetime bans. Southwest Airlines employees have also been warned by Vanguard to end their trading, according to Money.

Those of you who subscribe to Money may have seen the article. It’s not the first one on the subject and likely won’t be last. Though most mutual funds reserve the right to ban an investor from buying and selling its funds, it is rarely used. Investors who do get banned have frequently traded in and out of mutual funds, commonly on the guidance of a newsletter or an adviser.

It is my understanding that in order to get banned, or even to get a warning letter, a large amount of short-term trading has to occur. What prompts the warnings and the bans can often be a group of investors acting in unison, often on the recommendation of a central party (e.g., an advisory service). If enough shareholders move to buy or sell at the same time, the mutual fund could end up with more cash inflows or outflows then it is prepared to handle.

-from an AAII Investor Update email I received last evening.

This investor behavior is nuts.  Do these employees think they can game the market?  What an argument for having the government invest our pension savings - except that the government plays much larger and much more lethal games with the market.  

Kudos to T. Rowe Price and Vanguard for stopping this sort of thing.  They do so, not because they are investor-nannies, but because, among other things, it drives up costs for those financial institutions, costs which they, in turn, must pass on to the rest of us. 

I get solicitations all the time for financial newsletters and advisers such as the ones mentioned in the quote.   If the publishers and advisers are so good, why do they have to do their mass mailing solicitations in the first place and offer to sell their "best ideas?"  If they are so smart, then  .  .  .   Of course we know why: there is a sucker born every minute, and they count on it.

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