This is a pop quiz. Why do you invest in stock-owning mutual funds?

"Dummy," (you might say), "to ride the market's long-term growth."

I'd love to think that's really true, but today's investors seem to be playing a different game. They're trading mutual funds instead of buying them and holding on. Traders constantly buy and sell, to chase market trends or take a quick ride on a fund that seems to be going up.

That's not the way it used to be. Back in the 1960s and 1970s, only 9 percent of equity fund shares were sold or exchanged each year, says John Bogle, founder and chair of the Vanguard Group of mutual funds in Valley Forge, Pa. The average investor held a fund for around 11 years.

Now, investors want action. The annual turnover rate is running at 36 percent. Holding periods have tumbled to just over two and a half years.

Bogle says this has emasculated the very purpose of mutual funds. They were devised as long-term investments. Instead, they're being flipped around like a pack of cards.

Mutual fund managers are no better. In 1965-71, "the go-go years," managers traded 40 percent of the stocks in their portfolios annually. Last year, their average turnover rate was a huge 91 percent.

"What ever happened to long-term investing by professional managers?" Bogle asks.

One reason we're trading so much is that technology makes it possible. With a telephone call or a mouse click you can jump out of one fund and into another.

What's more, trading can appear to be entirely cost-free. You aren't taxed on your profits, if you're playing with a tax-deferred retirement account. If your game is no-load mutual funds, there aren't even any sales charges to give you pause.

Trading has a cost, of course. The funds have to administer all these jack-rabbit accounts. The price appears in the fees the mutual funds impose. But who cares about paying 1 percent in overhead, when the market is flying up so fast?

Another reason we trade is that we know so much or think we do. That's an illusion born of an overload of data.

Any hour of the day or night, we can track the market on the Internet, screen for the best performing stocks or funds, print out pages of data and check what a thousand gurus say. If you're not on the Web, you can get the same stuff from investment magazines.

But can we make sense out of this slag hill of facts? Probably not. Information isn't knowledge, Bogle says, and knowledge isn't wisdom.

Alan Abelson, columnist for Barron's investment magazine, writes that investors' IQs rise exponentially as their stocks rise arithmetically. Another 1,000 points on the Dow and we'll be a nation of geniuses.

Something else that tempts us to trade is the Balkanization of funds. Traditionally, they owned a cross-section of the market, so that we amateurs could easily share in long-term economic growth.

Today, however, many funds choose to invest in just part of the market: big firms, small firms, micro firms; individual industries or countries; value, growth or quantitative investment styles.

Just 20 years ago, the industry comprised some 300 equity funds. Today, there are 2,800 funds, Bogle says one-half of them formed in the past five years.

Naturally, investors find it harder to choose which funds to own. So they move around a lot, as different sectors of the market rise and fall.

Our favorite funds are those that have gone up a lot. For that, we turn to Morningstar in Chicago, the best-known tracker of retail mutual fund performance.

Morningstar assigns stars to funds, reflecting their risk-adjusted performance over three years or more. The funds with the best records rate five stars; those with poor records rate just one.

Last year, 90 percent of the money that flowed into rated equity funds went to those boasting four and five stars, Bogle says. Another $50 billion flowed into those too young to rate (but probably with red-hot returns).

Five-star funds are undoubtedly better than one-star funds, but on average they haven't beaten the market over the past three years.

So to what avail all this fund research, all this shifting and trading? There's absolutely no evidence that it improves investors' long-term gains. More likely, it's hindering your returns.

"Inactivity strikes us as an intelligent behavior," the famous investor Warren Buffet wrote in his company's recent annual report. In other words, buy and hold for the long term. You might want to try it yourself.

Health care backlash

What's the Rx for patients injured by a health plan's decision to deny them critical treatment they should have had?

Patients can and do sue their doctors for medical malpractice. But their health insurers are usually off the hook. In most states, it's all but impossible to bring malpractice charges against an employee plan.

The plan may have told your doctor that it won't cover a particular treatment because it's not "medically necessary." If the doctor accepts that decision, however, and it turns out to be wrong, only the doctor can generally be held at fault.

The injustice of this is becoming increasingly clear, both to legislatures and the courts. Around the country, a movement is stirring to hold health plans accountable for the decisions they make.

In May, Texas passed the first state law allowing patients to bring malpractice claims against HMOs and other managed-care plans.

Some 20 other states are considering similar laws. Proposals are on deck in New Jersey, under study in Rhode Island and Washington state, and moving through the tortuous legislative process in New York and California (with no guarantee of results).

The managed-care plans whine that malpractice shouldn't apply to them because they don't make medical decisions. If they rule that treatment isn't "medically necessary," they claim it's merely paperwork.

Thus, the HMOs and other managed-care plans are bringing this backlash on themselves. When appeals are slow and there's no independent source of justice, where else can consumers turn?

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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