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New funds give do-it-yourselfers more options

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Just as a surfer seeks the perfect wave, do-it-yourself investors are constantly on the lookout for the perfect investment vehicle.

Some of them consider traditional mutual funds a wipeout due to their high expenses and uneven returns. In addition, the investor has no influence on the portfolio manager and often doesn't even know where that manager's putting the fund's money.

"The biggest problem with big mutual funds is that they're really secretive about their holdings," said Jonas Ferris, founder and chief executive of the MAX Funds.com fund analysis and advisory in Ann Arbor, Mich. "For example, an investor specifically buys a small-capitalization fund and then as money rolls into the fund and assets grow it starts buying mid- and large-cap stocks."

With such concerns in mind, two new types of investment vehicles have been introduced that offer to either (1) let you and other investors "advise" your fund's manager on a Web site as to what to buy, or (2) permit you to easily create your own low-cost customized portfolio requiring no manager.

In the first case, the question is whether you or your fund should really care about what fellow amateurs have to say in a chat room. In the second case, you must ask yourself whether you're up to the challenge of investing on your own.

Examine the choices:

Some new funds let everyday Web surfers offer portfolio ideas that ultimately lead to the fund's actual stock picks. This includes the $5 million-asset Community Intelligence Fund, up 30 percent in value this year. It's one of several funds from StockJungle.com.

Using a Web site, it pools people's stock picks for screening to find the best choices. However, final portfolio selections for this aggressive growth fund are made by a fund manager who also subjects the stocks to fundamental analysis.

"We have 15,000 people in our (site's) community, we track the recommendations of these individuals, and we hold them accountable," explained Michael Witz, founder and CEO of Los Angeles-based StockJungle.com. "It gives us access to a wealth of investment information from those individuals we've determined have great long-term track records of picking certain types of stocks."

MutualMinds.com and IPS Funds will soon be entering the competition. Another choice, MetaMarkets.com’s OpenFund, obtains ideas and "New Economy" stock picks from its message boards and combines them with its own research. It also has a Web camera aimed at its San Francisco trading desk 24 hours a day.

There are Web sites that allow investors to create and trade their own baskets of stocks easily and inexpensively, with an opportunity to rebalance the portfolio as well.

For example, FOLIOfn lets its investors have three portfolios of up to 50 stocks each, with unlimited trading for $295 a year or $29.95 a month. However, trades are only executed twice a day. Investors can select from 75 prefabricated portfolios reflecting particular indexes, groups or risk levels. It's also possible to modify those portfolios or create original portfolios from 2,500 stocks.

"We want to change the way people think about investing, and we're targeting large, small and mutual fund investors," explained Steven M.H. Wallman, founder and chief executive of FOLIOfn in Vienna, Va. "You can come to our system, buy and sell a stock twice a day every day if you want for a flat fee of $29.95 a month, something you can't do with any other broker."

Coming soon are similar offerings from E-Trade's Electronic Investing Corp., Universal Network Exchange, Netfolio and Smartleaf. The last two will also offer investment advice. The more money you have, the more sense these vehicles make. Otherwise, the average mutual fund is less expensive in terms of fees for accounts under $25,000.

Despite their innovation, these new products can be confusing to average investors. Furthermore, it might make sense to wait for the newness to wear off, and to see how the service and the competition unfolds. Some new entries will undoubtedly falter.

Do such clever choices spell doom for traditional mutual funds?

"People have been forecasting the death of mutual funds for 30 years, but, with $7 trillion under management, they're not going to die anytime soon," said Ferris of MAXFunds.com.

Jaime Punishill, senior analyst with Forrester Research in Cambridge, Mass., considers it unlikely that mutual funds can compete effectively in current form.

"I'm not going to put a time frame on it, since it does take time to shift, but this is the death of the fund as we know it," predicted Punishill, who considers the mutual fund an unchanged relic of the 1929 market crash.


Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201, or by e-mail at successinv@aol.com