A Self Administering Stock Fund


As I've explained it's very hard to even equal the S&P 500 average when buying a mutual fund. First of all half are always going to be worse than average and second they all have fees of .5 - 2% for "management" that reduces the overall yield. These fees are a percentage of the fund's assets; as a percentage of the funds yield they can be quite large. For example, if the fund yields 5% and the fee is 1% then the net yield is 4%, but the fee as a percentage of the yield is 20%!

I suggest creating a fund based upon the philosophy of the wisdom of the "invisible hand" of the market which is supposed to guide things to the optimal price.

Let's create a fund which buys basically the S&P 500 as do all the others, but with a difference as to how trades are determined. After creating a fund with a representative balance of stocks in it the participants vote each month on how to rebalance the fund.

I'm assuming that the fund would be used by long-term investors that are putting it into an IRA or similar so that the amount flowing in would be greater than the amount flowing out, but not by much. So the major function of trades would be to invest the new funds deposited. Payouts for redemptions as people retire could normally be handled from the incoming contributions. Thus, the need for selling securities would seldom occur.

Each participant would get voting rights (fixed or perhaps proportional to the size of their holdings) for a stock to reduce in the portfolio. These rights would be exercised periodically, say once per month and would be used to nominate a stock that should be disfavored in the portfolio. This would be optional, there is no reason to reduce a stock if everything is currently OK. In any case the amount of reduction could not exceed a small percentage of the total amount held, say 10% in any month.

In addition the participant would get a vote on which stock to increase in the portfolio with the new funds as well as any from the sale. If the theory of the "invisible hand" is correct the fund should do better than the average because of the collective wisdom of the participants.

At least the transaction costs would be minimal and the need for high-priced financial "advisors" would be eliminated. Anyone interested in creating a virtual fund online to see how it fares?


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Copyright © 2004 Robert D Feinman
Feel free to use the ideas, but the words are mine.