May 10, 2004
Dear Sirs: I have written you numerous times about the problems I see with your proposed rule. With the markets diving yet again today, I feel it is irresponsible of you to saddle individual investors with the increased risk and expense that your rule will bring to them. In a bear market your rule will be especially costly. I take and pay for an investment commentary which I would like to quote today. This is from RealMoney.com and is a continuing column on investment advice.
Money Management the Key to Success
5/10/04 12:00 PM ET
If I were to teach only one lesson in the Trading Diary, it would be this: The key to success in the stock market is good money management and the key to good money management is cutting losses quickly.
...If you work methodically to cut losses and protect capital, you will outperform over the long run. Small investors have some great advantages, and the ability to cut losses quickly and easily is one of them.
So my single-best piece of advice as we watch the market melt down is: Work on finding good stocks but work even harder on good money management.
The few advantages that the small investor has, which are referred to in the quote, namely, flexibility and liquidity, will, to an unknown extent, be eliminated by your rule. The main difference in a mutual fund from any other investment is that if I am invested at the end of the day, I can do nothing tomorrow. I can not sell during the day and stop my losses no matter what happens. This fundamental difference increases the risk of the mutual fund investor. Now, you want to make them hold for 5 days and the fund companies are interpreting this even more harshly, namely 10 days, 30 days, 6 months even or penalize the individual for selling. This is regardless of whether it is an error, a reallocation, or the contract rights which the individual has negotiated.
YOUR RULE WILL INCREASE RISK AND INCREASE EXPENSES, WHILE DRIVING OUT THE SMALL PENSION FUND MANAGER. IT IS BAD POLICY, BAD POLITICS, AND, GIVEN THE RIGID POSITIONS WE SEE IN OTHER AREAS, WHICH ARE DRIVING US TO POTENTIALLY VERY BAD RESULTS, I HOPE THAT YOU WILL SEIZE ON THE ABILITY TO REEVALUATE YOUR PROPOSAL AND DROP IT. PLEASE. Darrell Wiard