"Evil." "Vermin." "Scavengers." "Dirtbags."

A mutual fund manager used those words to describe market timers in this month’s issue of Money magazine. The article was published under a headline that said "A secret battle is raging between fund companies and financial planners – and you may be caught in the crossfire."

The article says hundreds of financial advisors who use market timing have become "the mutual fund industry’s worst and most secret nightmare," pooling money from individual investors and using "bulk buying power" to trade huge blocks of mutual fund shares through discount brokers. "It’s routine for them to whip millions of dollars in and out of a single fund, often without warning and in a matter of days."

The authors say fund managers told them that such "hot money" disrupts funds’ investment strategies, raises costs for other shareholders and "often creates sudden tax bills." This activity "may have indirectly lowered your returns," according to the article.

Yet at the same time, the article states, fees the funds collect from this timed money are so lucrative that some leading families of funds "have spent millions of dollars from shareholders like you on marketing and promotion to attract the big bucks from the market timers."

Money says the inflows and outflows of timed money reduce other shareholders’ returns by raising trading costs of the funds, costs that are paid not by exiting shareholders but by those who stay. Redemptions force funds to sell holdings they would otherwise like to keep, and that can be disruptive to remaining shareholders, according to the article.

The article quotes Martin Whitman, manager of Third Avenue Value Fund, as saying that timers "take money away from us when we could most use it and they give us money when we have no good place to put it."

An uncritical reader could easily conclude from this article that market timers are somehow harmful to mutual funds and to other investors. But we don’t see it that way.

Over the years, we have maintained excellent relationships with mutual fund families, some of the largest of which have actively courted us. Some funds have welcomed us, then told us they didn’t want new money governed by timing, only to later come back and say they had grown enough that they could take more timed assets.

The investment business is about gathering assets under management. Funds collect those assets, and timers bring them in. That’s why, as the article states, fund families have spent millions of dollars marketing to market timers. For instance, some fund companies bought booths this year at the Society of Asset Allocators and Fund Timers in Arizona, obviously hoping to attract money guided by timers.

The broader perspective of ethics raises some interesting questions. Clearly, market timers have a responsibility to their clients and their subscribers. But the Money article seems to suggest timers also have a responsibility to mutual funds and to other investors. We don’t think so.

The investment world is not a realm of kindness and generosity. It’s not a place of collaboration for the greater good of all investors. In reality, it’s a world of competition, where being right requires the existence of somebody else to be wrong. When you buy Microsoft stock at $90, you are doing so in the belief that it’s really worth more than that. And you hope there’s a "greater fool" on the other side of the trade who’s willing to sell that stock to you at such a low price. The seller has previously determined that $90 in cash is worth more than a share of Microsoft, and he or she is happy to have found a "greater fool" (that’s you) who will pay such a high price for the stock.

Because investors always compete with one another, there are rules of fairness. These rules are enforced by government agencies and industry bodies, and most of the time this regulation works quite well.

If market timers and the people who act on timing signals have no ethical responsibility to mutual fund and fund shareholders, who does? Mutual funds themselves.

Fund managers obviously are responsible to make sure they can remain in business. And one way they do that is by looking out for the interests of their shareholders. They do that by making rules. Funds have unrestricted authority to encourage short-term trading, to tolerate it or to limit it.

Mutual funds could become severely restrictive if they thought it was in their best interests. But very few do so. Instead, funds are designed to give their shareholders maximum flexibility to be whatever kinds of investors they want to be.

We never knowingly violate the rules of any mutual fund in which we encourage investors to put their money. We use dozens of funds, and we always ask in advance about their trading limitations. We also limit the amount of money that we direct to any particular fund. We follow the funds’ guidelines, because it is in our interest to do so. We know that if we use timing systems that trade so actively that mutual funds turn us away, we’ll just lose access to the assets managed by those funds.

Individual investors who don’t use timing can and should look out for their own interests. Investors who believe that the entries and exits of timers are a hindrance to their own returns can avoid all the problems by buying index funds and holding them. They also can invest in funds that either have back-end loads or put other restrictions on short-term holdings, such as redemption penalties for selling shares held less than 90 or 180 days. Timers aren't likely to use those funds.

Most of all, individual investors can protect themselves by recognizing the risks they are taking and knowing what to do about them. As we wrote to the editors of Money, many investors don’t realize that the greatest risk they face in a diversified portfolio is market risk, the chance they will take a loss during a falling market. And many mutual fund investors don’t realize that market risk is purposely ignored by most mutual fund managers.

That’s right. Most fund managers are committed to remaining mostly or fully invested regardless of what’s happening in the market. That means shareholders who aren’t willing to passively accept significant losses must sell in order to protect themselves. Market timers don’t move the markets. Instead, we do something that mutual funds don’t: We advise our clients when market risks are so high that shareholders should protect themselves by selling.