Ulli...The Wall Street Bully — insights into no load mutual fund/etf investing

Sunday Musings: Emotions

2009-07-05T05:55:00.000-07:00

The task seemed simple enough and not much different than usual. Write another blog post just as I have done some 900 times over the past 2-1/2 years.

Share investment experiences that others can benefit from on their way to becoming better investors. The topic last week was “Emotional Aspects of Investing,” that attempted to answer a reader question.

Somehow the entire article caused more emotions in readers than I’ve seen in a while followed by appropriate responses; in part negative. If you haven’t read the comments, you may want to do so.

Writing a blog such as this one is nothing but a labor of love based on my need to attempt to make the investment world a better place. There is so much bad information being published that I feel like the lone ranger expressing viewpoints that do not align with main stream thinking.

I enjoy the interaction with readers along with questions and suggestions. My answers will always be straight, to the point and exempt from political correctness.

From the feedback I have received via emails, it is satisfying to know that my thinking has helped thousands of investors. However, no matter what I do, there will always be some whiners and complainers; fortunately, they amount to a small minority of less than 1%. I don’t take their comments personally, but attribute them to other troubles in their lives.

One reader summed up the comments perfectly when he said:

Well it seems the free-loading deadbeats such as myself gave you a thorough tongue lashing as some of them may have had to dip into their pocketbook a little. Did they really think cause this approach is free it is a perfect guarantee.

You have cautioned reams about entry on a new positive go signal. Looks like the deadbeats used any retort to unload. None of this had to do with your original response. If the folks cant handle a loss in their 5-10-20 year horizon they certainly should not be investing themselves or perhaps in the marketplace at all. Where do people think all the profit in the market comes from anyway?

It’s pretty much a zero sum game so it is the greater fool being clipped and sheared. The 1 or 2% usually charged over 20 years is well spent rather then changing like myself to another method every time a wave comes along.

The initial question was how does one side step emotion if the go signal was close to a "gut feeling" correction? Yours was discipline. And the emotion sometimes is to wait a day or 2. Nothing wrong with that. It doesn’t change a methodology, it confirms one and acknowledges as you said we are all human. If these gents think you have been brash, well...

It was negative week on Wall Street, which seemed to have been reflected in my blog universe. Be that as it may, I will continue the chosen path by trying to provide you with straight talk about investments whenever possible.

Watch The Market Dive

2009-07-04T05:50:00.000-07:00

In case you missed it, Al Thomas, author of the well known book “If It Doesn’t Go Up, Don’t Buy It!” posted another right-on-the-money article last week titled “Watch The Market Dive:”

The form is predictable. The execution is slightly different.

That is the difference in a belly whopper and a 10 at the Olympics.

Each participant slowly climbs the ladder to the height that has been chosen. She then walks along the level area of the board to the end and grips the board with her toes, bends her knees and with a final spring to a high point her body dives to a final splash.

This is the same form for our stock market. Watch closely. Since March investors have slowly climbed its ladder (Called a ‘Wall of Worry’) and the market has now leveled off. It has reached the end of the level price range and is now ready to make its final spring before that fatal plunge into the depths.

Our market mavens have turned from swimmers into gardeners. The early seeds of March have sprouted into “green shoots”. Any bit of bad news that is not as bad as the previous news it greeted with sprinkling of fertilizer, shouts of joy and some buying. Some, not all, are willing to take a chance at this level. Lack of buying will allow the market to fall of its own weight. There is not enough fertilizer.

Any professional trader with 10 or 15 years of experience will tell the novices that he has never seen a “V” bottom that continued up. There always has to be a test. The market must come back to prove its strength by not making a new low. This is the famous “W” formation the institutional investors are waiting for.

The next market weakness must prove itself by not making a new low on the coming setback. Then professional traders will put the market up.

Historically in 1929 everyone remembers the horrendous bear market, but no one remembers that big rally in 1930.It was this subsequent decline that did more damage than the first decline. Will that happen again? That is the 64 Trillion dollar question.

Based on the actions of Washington politicians the most likely correct guess would be ‘yes’. Huge unbridled and increasing debt and trillions in entitlement programs can only stagnate the U.S. economy. Washington is following the same road as Japan which is now in its 17 year of recession.

Politicians find it easier to get elected by promising more “free stuff” than being financial responsible. As they get elected they shift the solution (if there is one) to the next generation. Our children and their kids will be paying these bills.

Maybe the whole world will declare bankruptcy and everyone can start over. And pigs can fly.

Our diver is approaching the end of the board. The final spring is about to be sprung. Investors are about to plunge in over their heads again. Many will drown.

I have to agree with this assessment and can only recommend that those investors, who were blindsided by last year’s market debacle, better be prepared (via a sell stop discipline) to deal with the possibility of another downdraft. I am not being negative here, but simply realistic in looking at where we are, economically speaking, and were we might be going.

We’ve rebounded off the bottom but only barely into bullish territory. There is no assurance anywhere that this trend will continue; on the contrary, with the question abounding about the reality of a second half recovery, we could see a trend reversal in no time at all.

If you have not read Al’s book, I suggest you do so. Yours truly, along with Trend Tracking, is honorably mentioned.

No Load Fund/ETF Tracker updated through 7/2/2009

2009-07-03T11:58:00.000-07:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A dismal employment reports handed the major indexes (S&P 500 and Dow) their third weekly loss in row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +2.04% keeping the current buy signal intact. The effective date was June 3, 2009.

The international index has now broken above its long-term trend line by +8.42%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Roller Coaster

2009-07-02T05:47:00.000-07:00

This week so far has been a little roller coaster with an up day followed by a down day, which was followed by an up day.

The moves have been fairly contained during this Holiday shortened week, and I would not read too much into these market swings.

Since the Wall Street mavens support a quarter to quarter mentality, it’s not surprising to see the focus on the S&P’s +15.2% gain during the past 90 days. This, of course, does not tell the entire story.

Year-to-date, the index is up a scant +1.81%. All of the gains for the past quarter resulted from left over momentum from the March low rebound and happened within the first 5 weeks. Since May 6, the market in essence vacillated aimlessly and gained absolutely nothing.

In other words, the quarter started out with a bang and ended with a whimper, which makes me question the sustainability of the move.

While the rebound was strong enough to generate buy signals for our international and domestic Trend Tracking Indexes (TTIs), there has not been much follow through to the upside, which means we have not gone anywhere with our positions. As I have repeatedly said, a new catalyst is needed to provide the impetus for further gains.

Today, a day earlier than usual, the employment report will be published with a June loss of 498,000 jobs to be expected. Anything substantially less will very likely be greeted with a rally, while a worse figure could cause the markets to sell off.

Living With A Sell Stop

2009-07-01T06:00:00.000-07:00

With the international markets having come off their highs, after racing out of the gate following our Buy signal on May 11, 2009, many readers have been stopped out of their positions and are looking for a new entry point.

Reader Dave had this to say:

I thoroughly enjoy reading your daily blog. I am convinced that your method is far superior to buy and hold but seem to have stumbled out of the gate and would appreciate some help in a couple of areas.

On the first day you gave the buy signal for international and domestic funds I purchased funds from your list. I recently hit my 7% stop loss for domestic and 10% for international funds for a loss. Please provide some comments on the following:

1. Should I pick additional funds and re-enter now or wait?
2. Any additional comments on which funds to pick would be appreciated.
3. Comments on how to set stop losses...7%, 10 %, etc.

I am 54, have suffered through the buy and hold of the early 2000s and 2008.

Dave brings up some good points that are worthy of further examination.

First, let me make it clear that, once a sell stop has been executed, you will find yourself in no-man’s-land. If the markets head further south, you’ll feel like a hero in that you made the right decision. If, on the other hand, the markets remain stable, or start to move back up, you may question the wisdom of your choice.

No matter what you do, you need to simply accept the fact that there is no perfect solution to this dilemma. You made the right decision by controlling the downside risk, and you now can either stay on the sidelines or try to find a new entry point.

You are not alone; this happened to me in my advisor practice as well. However, jumping back in, just because the markets moved a couple of percent, may not be the right choice.

While there are probably several options, let me share with you what my process of re-entering consists of. Before establishing a new position, I want to make sure that whatever trend is in place is sustainable.

Say I bought an ETF at $40 and it made a high of $44, before retreating and stopping me out at around $40.50. That leaves me with a slight gain. The markets bob and weave, and this ETF now hovers around the $41.50 level. Should I buy in or not?

Personally, that is not enough confirmation for me to believe that the trend has continued. If I like this particular ETF, and want to reinvest in it, I want to see the old high of $44 taken out before pulling the trigger and establishing a new position.

While this goes against conventional wisdom, I am more comfortable jumping aboard once momentum is accelerating and that means a break out to the upside.

Keep in mind that this is in no way an exact science but merely my way of trying to avoid another whip-saw by letting the market show me the way. If this ETF makes new highs, that to me confirms a resumption of the uptrend. If it doesn’t, I am glad I stayed on the sidelines.

Emotional Aspects Of Investing

2009-06-30T05:37:00.000-07:00

One reader had the following questions in regards to controlling emotions when making investment decisions:

How long did it take you to be disciplined to follow your trend change in the contexts of all your emotions that a market may be just ""too high"" when it turns positive to reinvest?

Is that still a very powerful force? You even seem to hedge your rules a bit waiting for the price to go 'X' amount your trend line.

Is that a big advantage of a fee based service to invest others’ funds?

Being an engineer by training, I never liked any approach to solving a problem that did not have a clear projection of several possible outcomes along with potential solutions as to how to deal with them.

I guess the need to have some means of control translated into an investment strategy that at offered me an opportunity to try to make unemotional decisions, because I already had decided that I could live with the possible outcomes (via a sell stop discipline).

It’s simple but not easy. No matter how long you’ve been involved with investing, there is always some emotion involved; you just learn how to deal with. Again, if you can live with the projected worse case scenario, then that should limit your emotional involvement.

Most investors have a hard time with it, so for some it’s simply easier to have someone else make the decisions for them. That assumes, of course, that the investor is in agreement with the methodology being employed, especially with the exit strategy.

In some ways, it’s almost easier to handle other people’s money, because you’re not emotionally attached, although you are responsible for it. I try to educate people in advance so that there are no surprises later on.

Much depends on the client’s attitude as well. There are some, whose life consists of following not only every tick of their holdings, but they also tune into every silly investment show on TV. That’s usually counter productive to any investment approach.

I have some clients who simply have no interest in the financial markets at all. They live busy lives and just want to be assured that there is a plan in place to protect their assets in case disaster strikes. They look at the big picture and spend no more than a few minutes a month reviewing their statements.

Even when following a pretty straight forward approach such as trend tracking, there are still subjective decisions to be made. They are not necessarily emotional in nature but require “user input” so to speak. That usually happens at major inflection points when buy or sell signals get generated.

To avoid potential whip-saw signals, I let the Trend Tracking Index (TTI) clearly pierce its long-term trend line before pulling the trigger. That is what I consider “user input” and is designed to simply avoid unnecessary trading signals whenever possible. Sometimes, we have benefitted by such a decision and sometimes it did not matter.

The key is to systemize an investment approach as much as possible, but I don’t think you can expect that effort to reach the 100% level.

Reader Q + A: Buy And Hold

2009-06-29T06:02:00.000-07:00

Reader Peter had these comments recently:

I always enjoy your daily Blog and I do follow some of your investment principles. Keep up the good work.

Today I have a question about "Buy & Hold."

There has been considerable press lately (since the market chaos during the last year) about the death of buy and hold.

Have you done any studies to compare your investment strategies to see how they would stack up against the typical "buy & Hold" over the last year? I am really interested in any studies that you may wish to share with us.

A point that I think is important is to not just compare figures with the S&P 500, but also Europe and Emerging Markets. Any Buy & Holder with "brain in gear" can be expected to be diversified across the global markets.

There is not much research necessary to evaluate how diversification across the globe has fared during last year’s market collapse. Let’s take a look at a chart comparing the S&P 500, with Europe (IEV) and the emerging markets (EEM) over the past 2 years:

[Click chart to enlarge]

As is the case most of the time, a picture is worth a thousand words. All equity markets declined with utter abandon, and that is no surprise. Equities will benefit only in a bullish environment to varying degrees and will collapse when the market turns bearish.

This is simply common sense and not rocket science. And nothing is more uncommon than common sense when it comes to investing.

Many investment professionals either don’t have a clue how to indentify a turn in market direction or, if they do, they may not want to take any action as explained in “The Naked Truth.”

Sunday Musings: The 529 Problem

2009-06-28T05:36:00.000-07:00

Several clients of mine have been involved with 529 college savings plans. The love affair with these instruments came to an end last year when many realized the severe limitations of getting out of invested positions within the plan guide lines.

Reader Chris summed it up this way:

What would you do about funds in a 529? I feel helpless since you can only change the allocation once a year!

Let me first say that I am not expert on these plans. However, ever since they were introduced, my view has been negative. Not because of what the plans were meant to accomplish, but because of the limitations on the investment side. To be able to only change an allocation once a year is totally unacceptable to me.

While this worked fine during bull markets, last year’s market crash provided a reality check for those invested in 529 plans. Some of my clients simply opted out, paid whatever taxes were due, and transferred the proceeds to a custodial account.

Saving taxes to provide funds for college is a wonderful thing, but not if it comes at the expense of making wise investment decisions. If you have been involved with such a 529 plan, I like to hear your experiences so other readers can benefit as well.

The Naked Truth

2009-06-27T05:50:00.000-07:00

A few days ago, Mish at Global Economics wrote a nice piece called “Long Term Buy and Hold Is Still Bad Advice.” I want to hone in on a few paragraphs outlining well known pitfalls when investing that are very important; however, most investors are either not aware of them or don’t pay attention:

Why Is Bad Advice So Common?

Clearly, stay the course is bad advice. So why is it so common? A personal anecdote might help explain things: In January of this year, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like". I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet "Stay The Course".

There you have it. Nothing has changed since the last bear market in 2001 as I wrote back then in “The Conflict of Interest Game,” “The Demise of Buy and Hold” and “Your Worst Enemy to Successful Investing.” These articles are 8 years old, and I am sorry to say they are just as true nowadays as they were back then.

A Look Ahead

Clearly stocks are a better buy now than in 2007 or 2008. But that does not mean stocks are cheap. Indeed, by any realistic measure of earnings, stocks are decidedly not cheap. Then again, 6-month treasury yields are yielding a paltry .31%.

Can equities easily beat that? Yes they might, but that does not mean they will! Fundamentally, the S&P 500 can easily fall to 500 or below, a massive crash from this point. Alternatively, stocks might languish for years.
...

The Japanese Stock Market is about 25% of what it was close to 20 years ago! Yes, I know, the US is not Japan, that deflation can't happen here, etc, etc. Of course deflation did happen here, so the question now is how long it lasts. Even if it does not last long, there are no guarantees the stock market stages a significant recovery.

Buy and hold is no more likely to be a good choice for the next 5 years than it was for the last 20.

Yes, no one knows how the next few years will play out, but a similar scenario, as Japan has experienced, is a distinct possibility.

From this point forward, we may see rally attempts followed by sharp drops into bear market territory or vice versa. So far, this century has not been kind to the buy-and-hold crowd with the S&P 500 being down 37% since 12/31/1999.

I believe that there are several steps you can take to guard against the unknown:

1. Never ever listen to anyone with a biased opinion, such as a commissioned sales person. The closest you can get to receiving unbiased advice is from a fee only advisor.

2. Never take any investment advice from the media.

3. Follow the trends in the market place and be disciplined by establishing an exit point at the time you make your initial investment.

4. Take a little time to explore my SimpleHedge Strategy. I believe it has great potential to successfully deal with the uncertain market conditions we will be facing over the next few years by greatly reducing market risk while offering good profit potential.

No Load Fund/ETF Tracker updated through 6/25/2009

2009-06-26T17:50:00.000-07:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

In a repeat of last week, the major indexes closed slightly lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +2.46% keeping the current buy signal intact. The effective date was June 3, 2009.

The international index has now broken above its long-term trend line by +9.22%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Staying The Course

2009-06-25T06:08:00.000-07:00

The Fed left key short-term interest rates alone as expected and hinted that the economy, while stabilizing, does not require any rate hikes in the near futures.

While that should have been good news, Wall Street reacted somewhat negative, and the major indexes surrendered their early gains, as the above chart shows. Meeting anticipation apparently wasn’t a good thing.

Right now, we’re still stuck in a trading range, which encompasses about 880 to 910 on the S&P 500. As I said yesterday, be prepared that a breakout will occur; that is a sure thing. What is unknown is when it will occur and whether it will be bullish or bearish.

This lack of direction is reflected in our Trend Tracking Indexes (TTIs) as well, which have not moved much at all. Here’s the latest update:

Domestic TTI: +0.58%
International TTI: +7.61%
Hedge TTI: -0.49%

We’re holding all positions subject to our trailing stop loss points.

Nothing Doing

2009-06-24T06:04:00.000-07:00

As the Trend Tracking Indexes (TTIs) are hovering tightly above or below their long-term trend lines, I tend to spend a little bit more time updating the important numbers you need to know on a day-to-day basis.

These are critical times in terms of making decisions and, once a clear trend (either up or down) has been established again, I will focus again on other issues.

Yesterday, the markets retreated first and then traded the day in a sideways pattern, essentially closing unchanged. What that tells me is that there is great uncertainty, and we could very well be at a major inflection point. That simple means that right now upward and downward momentum are fairly balanced, which is why we haven’t seen any clarity in direction.

While this pattern may continue for a while, sooner or later a break out will occur. That could be either in form of a renewed downward slide back into bear market territory or as a breakout, which could carry the major indexes to higher levels.

I have no clue which way it will play out but, as I have repeatedly said, I prefer to err on the side of caution. To me, that means enforcing my sell stops even if I have to hunter later on for a new entry point should the markets head back north.

The old saying that “I’d rather live with lost opportunity than with lost money” is something that many investors should take to heart in these uncertain economic times.

A Dubious Anniversary

2009-06-23T05:38:00.000-07:00

The markets started the week out on a sour note yesterday as they have for the past two Monday’s.

Some of our sell stops in the international arena were triggered and, barring a major rally today, the affected positions will be liquidated.

It was a bit of good news/bad news scenario. The good news was that the sell off happened on light volume (again), but the bad news was that we closed at the lows for the day as the above chart clearly indicates. This means that further weakness is likely.

A forecast from the World Bank that the global economy will contract by 2.9% this year vs. an earlier forecast of a more moderate 1.7% proved to be more than the markets could handle and south we went.

Our Trend Tracking Indexes (TTIs) slipped as well and are showing now the following positions:

Domestic TTI: +0.12%
International TTI: +6.60%
Hedge TTI: -0.94%

This means that we are within striking distance of a domestic sell signal. Before pulling the trigger, I want to make sure that the TTI clearly pierces the trend line to the downside. I will keep you informed via this blog, so stay tuned to any changes.

Today marks the one year anniversary of our last domestic Sell signal, which was effective 6/23/2008. Those who followed it were richly rewarded; those who didn’t suffered steep portfolio losses. One year later, the S&P 500 is still down over 32% from the point of our sell signal and many portfolios are worse off.

At this very moment, it seems to me that the government induced stimulus rally has run out of steam, and we will need to wait to see if there are some positive news on the horizon that can pump some life into the fading indexes.

I won’t hold my breath, but I believe that a defensive posture, such as I advocate via our hedged positions, is in order—at least for the time being. If things get worse, we will be heading for the sidelines.

Again, my mode of operation is (and always has been) that I’d be rather safe than sorry. I suggest you do the same, if you handle your own portfolio.

Are Long/Short Funds The Solution?

2009-06-22T06:05:00.000-07:00

The investment world is scrambling to come up with new and improved products to ascertain the public does not lose confidence. I posted about actively managed ETFs and “new funds for the fearful” over the past couple of days.

Now Long/Short fund providers started to chime in by promoting the features of their products. I received one such mailing from Palantir Funds with the following comment:

In these turbulent times, it may be vital for you to have awareness and access to alternative investment strategies designed to work well through all market cycles. The Palantir Fund (PALIX) is such a vehicle. Regardless of market direction, the goal of the Palantir Fund is to make money every year. Using a Global All Cap Long/Short investment strategy, this no-load mutual fund is designed for use as a core holding in a well invested portfolio.

2009 continues to unfold as a year of volatile, emotion driven trading. Through this maelstrom, the Palantir Fund has been able to generate nicely positive returns. We have been able to add significant value over our benchmarks in all of the relevant time frames.

• Lipper ranks the Palantir Fund as the 8th best Long/Short fund over the last 12 months through May 31st (Ranking are calculated on the total returns based on NAV of the 93 funds in this category over the time period).

• Zacks Investment Research ranks the Palantir Fund “1 for Strong Buy”

I don’t think much of ranking agencies and much prefer to a look at a chart. Here’s a graph of PALIX plotted against the S&P 500 as comparison:

This fund has only been around for about 1-1/2 years. What becomes very clear is that PALIX tracks the S&P 500 pretty closely. While it did not drop as sharply during the 2008 market massacre, it nevertheless did not avoid the sell off.

If you are of the opinion that Long/Short funds are the savior during bear markets, you’d be dead wrong. As last year has shown, PALIX reduced portfolio damage somewhat, but not enough to make me comfortable owning this fund when the next down leg occurs, whenever that will be.

Portfolio damage in bear markets can only be controlled by being out of equities and on the sidelines (or possibly in bond funds) via a clearly defined entry and exit strategy. Long/Short funds have been around a long time, but they don’t seem to address that issue to make them a valid investment choice.

Sunday Musings: Going Active

2009-06-21T05:48:00.000-07:00

MarketWatch featured an interesting article titled “ETFs may give mutual funds a run for the money.” Let’s listen in:

We'll soon find out if exchange-traded funds can live up to the hype and "replace" the traditional mutual fund.

The big headline news this week was BlackRock Inc. agreeing to buy Barclays Global Investors in a $13.5 billion deal. But the history-changing news was the registration of four new actively managed exchange-traded funds.

Most ETFs are index funds, and not portfolios based on manager intuition and research.

Grail Advisors, which develops ETFs, is looking to change that. The investment firm plans to launch four funds to be managed by RiverPark Advisors, where top management team previously was involved with the Baron Funds.
...
Bill Thomas, Grail's chief executive officer, highlighted some clear reasons why investors could flock from traditional funds to actively managed ETFs.

"First, there's the lower expense ratio of the ETF versus a mutual fund, so that you get the same expertise but at a lower price point," he said.

"Then, there is transparency, the ability to know what is going on in the portfolio on a daily basis. The third advantage is that the ETF structure is more tax efficient than a mutual fund, and the fourth is liquidity, where you can trade on a moment's notice. We now live in a world where you can trade 24 hours a day; why would you want to be in an investment vehicle that only trades once a day?"
...

For years, there has been back-room talk of how some traditional fund managers -- particularly those struggling to attract assets and achieve the critical mass necessary for long-term success -- might go through the conversion process and "go ETF."

Still, active ETFs have to prove that they can back up the hype.

ETF supporters believe their vehicle is "the way to go," but an ETF is still a mutual fund. Better platform -- but the same underlying concept. Active managers can lag the market whether they run a traditional fund or an ETF.
...

So the next phase in the ETF revolution will be an explosion of active funds, but an investor who prefers managed funds shouldn't join the revolution until they believe that an active ETF is superior to the traditional funds they hold.

I am all for alternative investment solutions, especially if they offer the individual investor freedom of choice. To me, that simply means getting them away from the world of ridiculous short-term redemption fees and minimum holding periods so common in the mutual fund industry.

If the competition between ETFs and mutual funds heats up, everyone will be better of with improved product choices and less restrictions. Eventually, mutual fund providers need to come off their high horse if they are to remain in business and compete successfully with ETFs.

Having said that, I also need to caution you that just because an ETF is actively managed, it will do no more for you than an actively managed mutual fund if you continue to follow the loser’s approach to investing by simply buying and holding.

2001/02 and 2008 have proven that it does not matter what investment you are involved with, or which fancy asset allocation model you were sold, they all went down with the bear market.

Actively managed ETFs are just like mutual funds in that it is still up to you to make appropriate investments decisions (or hire someone who will do it for you) as to when to be in the market and when not.

If you think that actively managed ETFs can take that responsibility from you, you will be sadly mistaken when the bear rears its ugly head again.

New Funds For The Fearful

2009-06-20T05:39:00.000-07:00

MarketWatch reports that “Bear Market brings new funds for the fearful:”

After last year's market meltdown savaged just about every U.S. and international asset class, many investors have concluded that traditional portfolio diversification is not only discredited, but pure bunk.

In an appeal to these skeptics, some mutual-fund firms have introduced products they claim provide greater protection in bear markets than traditional balanced funds that blend stocks and bonds.

Firms say that investors can find comfort in these new funds, knowing that losses will be minimized and risk-awareness increased. But critics point to the higher fees and lack of a track record for some of these portfolios, and question the need to tinker with established investing formulas.

"I'm quite skeptical of any fund that says you can have your cake and eat it, too," said Leo Marzen, partner at New York-based wealth manager Bridgewater Advisors Inc.

Among the new-style mutual funds launched this year are so-called absolute-return funds from Putnam Investments, and the AIM Balanced-Risk Allocation Fund, an asset allocation fund from Invesco Ltd. that invests according to risk-management techniques.

Absolute return is a strategy that shoots for positive returns regardless of market conditions. The problem, say critics, is twofold: There's not much wrong with mainstream investing strategies that a tweaking of asset allocations can't fix, and 2008 was such a bad year that everything suffered.

"A lot of this is just a reminder that really nothing worked last year," said John Coumarianos, a mutual-fund analyst at investment researcher Morningstar Inc. "Treasuries were the only thing that held up."

[My emphasis]

Read the highlighted part again. The ignorance and cluelessness is absolutely mindboggling.

To state that “there is not much wrong with mainstream investing strategies that a tweaking of asset allocation can’t fix” has to go down as the most stupid statement of the year. I would like to see a sample of that tweaked asset allocation. Tweaking it how? By adding a different menu of bullish funds and hoping they will fare better during the next bear market?

Yes, everything asset class suffered in 2008. Moving to the sidelines, and staying in cash, was the only way to survive the bear. But that is something you will never hear in the mainstream media and certainly not from Morningstar.

Be very aware of the pitfalls when you read articles like this one and look at the “new funds” with a grain of salt. Chances are that this is just another attempt to keep people investing when common sense (and Trend Tracking) tells you, you should be out of the market altogether.

No Load Fund/ETF Tracker updated through 6/18/2009

2009-06-19T17:06:00.000-07:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A sell off early in the week caused losses for all major indexes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.08% keeping the current buy signal intact. The effective date was 6/3/2009.

The international index has now broken above its long-term trend line by +8.75%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Unleashing Creativity

2009-06-18T06:09:00.000-07:00

President Obama attempted to unleash creativity by announcing the widely anticipated new regulations designed to overhaul financial markets.

The new regulations would increase some of the powers of the Fed but also add another layer of bureaucracy via a newly created consumer protection agency.

For some straight talk, please read Mish’s commentary at Global Economics titled “Obama's Blueprint for Reform Concentrates Still More Power in Hands of the Fed.”

The market’s merely yawned and ended almost unchanged. Our Trend Tracking Indexes (TTIs) barely moved, and we seem to have reached a point of equilibrium. With no apparent driver to propel the indexes higher, the path of least resistance could very well be to the downside.

Nobody knows for sure, so we are content tracking our sell stops and will let the market tell us what our next move is to be.

Slipping And Sliding

2009-06-17T05:38:00.000-07:00

Monday’s market drop continued Tuesday as economic worries persisted.

The only saving grace for the bulls so far was that volume was very light again, and the S&P 500 bounced off its 200-day moving average.

Our Trend Tracking Indexes (TTIs) all retreated and are showing the following positions:

Domestic TTI: +0.62%
International TTI: +7.92%
Hedge TTI: +0.03%

Weakness has definitely set in and pulled our international holdings off their highs. We will watch the sell stops closely and take action when our pre-set trigger points get pierced.

Coming Off The Highs

2009-06-16T06:07:00.000-07:00

A variety of forces combined yesterday and pulled the major indexes off their highs.

Some kind of a correction was long overdue with the markets having enjoyed an extended run. It remains to be seen, if this is the start of something prolonged.

Judging by the low volume, it does not appear that way but, nowadays, you need to be prepared for the fact that anything is possible. We may very well enter a period in which neither wild fear is coming back into the market nor unbridled enthusiasm.

Our Trend Tracking Indexes (TTIs) retreated and are hugging their respective trend lines as follows:

Domestic TTI: +0.86%
International TTI: +8.79%
Hedge TTI: +0.27%

All buys signals remains if effect subject to our trailing stop loss points.

SPY vs. SH

2009-06-15T05:33:00.000-07:00

Reader Joe had an interesting comment in response to Saturday’s post “Beating the S&P 500 Index with an S&P 500 Mutual Fund.”

Here’s what he had to say:

There is a flaw in your hedge - all Ultra-Long and Inverse funds have a "daily rebalancing" problem that causes them to all trend down over long periods.

For example, if you bought SPY in early November and sold it yesterday, you broke even. However, if you held SH for the exact same period, you would have lost 10% of your money. See the charts attached.

You are better off shorting SPY as a hedge (or even better, shorting 1/2 as much of SSO since it has the same problem, but by going short you put it to your advantage - the trouble is finding shares to short, and also you can't short in a retirement account).

I appreciate Joe’s input since it allowed me to look at other hedge scenarios I normally would not have considered. I do not advocate hedging SH vs. SPY, but since he brought it up, I decided to run the test.

As an aside, whether inverse funds do daily rebalancing or not, does not matter to me; what matters is the published closing price, which is what I work with and which is the standard used to mark all accounts to market.

There are a few things that you may have overlooked when doing your calculations. First, SH had a huge distribution in December 08, which you must have not have considered. Here’s what the matrix looks like for that time frame:

[Click on chart to enlarge]

Please note, the distribution had a major effect on the outcome during this period and is most likely not accounted for in the charts you presented.

Second, the key is the rebalancing of the hedge when it becomes lopsided. Any hedge has an optimum rebalancing percentage, but for this example, I have used 61%.

Here’s the summary for testing your hedge SH vs. SPY for the period of 11/3/08 to 6/12/09:

[Click on chart to enlarge]

As you can see, this turned out to be a winning situation and not at all what you had assumed. It’s a better outcome than what I would have expected from such a hedge combination.

Sunday Musings: More ETF Offerings

2009-06-14T06:18:00.000-07:00

Reuters reports that “Flood of ETFs promising hedge style returns.” Let’s take a look at some highlights:

Money managers are flooding the market with exchange-traded funds (ETF) and mutual funds designed to give even the smallest of investors access to hedge fund returns without all the usual restrictions or hefty fees.

IndexIQ Advisors, a start-up firm that seeks to replicate hedge fund performance, on Tuesday launched the index-based IQ Hedge Macro Strategy Tracker ETF (MCRO.P), about 75 percent focused on emerging markets and 25 percent on global trends. The offering joins the IQ Hedge Multi-Strategy Tracker ETF (QAI.P), which began trading in March and is up 17 percent.

Both ETFs charge a fee of 0.75 percent and invest in a range of ETFs, with the exact mix determined by computers looking to mimic hedge fund returns.

And there's a lot more to come. IndexIQ in April told the Securities and Exchange Commission that it plans to launch as many as 15 exchange-traded funds emphasizing different hedge fund strategies. The next offerings to come include a natural resources ETF, which will invest in stocks, and an inflation- hedged product buying a mix of commodity and equity ETFs.
...

Davidow says index funds offering hedge fund strategies can be beneficial to all investors, muting ups and downs and generating returns not tied to the overall market.

Since its launch nearly one year ago, the IQ Alpha Hedge Strategy IQHIX.O mutual fund has been flat, which is good compared with a 22 percent decline in comparable hedge funds and a 25 percent fall in the broader U.S. equity markets.

Disappointing hedge fund performance last year and redemption blocks have angered big investors and created a rare opening for new offerings. Firms such as IndexIQ, WisdomTree Investments and Grail Advisors intend to take advantage of the popularity of ETFs while offering strategies that used to be exclusive to the super rich.

[Emphasis added]

Using a hedged approach to investing can offer tremendous benefits as I have been trying to explain over the last 3 months. However, in the past, most of those strategies, as represented to the average investor via Long/Short funds, have been expensive and not yielded satisfactory results.

Only time will tell if any of the above mentioned ETFs will live up to their expectations. I believe that using my SimpleHedge Strategy is a step in the right direction and, while cost effective, it is well suited for the individual investor who likes to have some means of control over his portfolio no matter what size.

Beating the S&P 500 Index with an S&P 500 Mutual Fund

2009-06-13T05:31:00.000-07:00

I must admit that I have been having a lot of fun lately. Not the kind of fun you are probably thinking about; it was more the kind of fund that results from satisfying a curiosity as to what might happen when various scenarios are applied to an investment discipline.

Sine I published my free e-book “The SimpleHedge Strategy” back in March, a lot has happened it terms of uncovering the enormous possibilities that exist when using such an approach. Today, I will share one of those results with you, and I’m sure that it amazes you as much as it did me.

A few weeks ago, I finally received my custom made program, which quickly lets me analyze any period in history (for which data exist, of course) to see if a hedged approach using ETFs and/or no load funds would have made sense or not.

I’ve been mainly focusing on testing scenarios in this century since it offered us two devastating bear markets that have clearly demonstrated the short comings of just about all of the canned asset allocation approaches.

Since ETFs were not available for most of the period, I have substituted them with no load funds (or load waived funds). The goal was for me to see if and how my SimpleHedge approach would work when pitted against the S&P 500 index by using an S&P 500 no load mutual fund.

For the short side of the hedge, I selected BEARX, and on the long side I randomly picked PEOPX, both of which have data going back to 1996.

I ran the numbers to generate yearly returns, including reinvested dividends, and this is what I came up with:

I was pretty amazed when I saw those results. How is this possible? Simple. The key is NOT to buy-and-hold the hedge, but to rebalance it appropriately as described in my e-book.

Rebalancing is the key to all success when using my hedge approach since it locks in profits and minimizes losses. If you look at the numbers above, you’ll notice that the “feast or famine” type of investing so prevalent in buy-and-hold scenarios has been smoothed out. In this example, the returns are steady and while big drops are eliminated (2002/2008), so are big gains (2003).

However, as you can see, it is not necessary to have high gain years such as 2003, which are simply neutralized with the next downturn.

I am not saying that this is a scenario you should use; I am merely pointing out what can happen if you apply a hedge discipline over a period of time during which most investors and professionals lost when using the S&P 500 as a benchmark.

I have no positions in this hedge, although I am using BEARX with other hedge combinations. I have found a number of hedges I am currently using that have produced twice the return of the above BEARX/PEOPX combination, which means that they are on par with returns that most investors only hope to get with straight long positions.

In my advisor practice, I use hedges along with outright long holdings depending on our trend tracking signals and have found this to be a great combination for most clients.

The point of all this is not to discard a hedge approach as something inferior. My work has shown that hedging can offer great upside potential with severely limited downside risk, which is what most (not all) investors are looking for.

No Load Fund/ETF Tracker updated through 6/11/2009

2009-06-12T17:48:00.001-07:00

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Trading around the unchanged line made for an uneventful week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.65% keeping the current buy signal intact. The effective date was 6/3/2009.

The international index has now broken above its long-term trend line by +10.93%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Not Much Of A Day

2009-06-11T06:02:00.000-07:00

On Wednesday, the markets did a repeat performance of Tuesday by selling off early and staging a nice rebound in the afternoon. Nothing much changed in terms of our invested positions.

Today’s hat tip goes to Mish at Global Economics for posting a video, which tries to answer the question how some of the trillions of dollars that have been spent are being accounted for.

I had to listen to it twice, because I just could not believe that so much ignorance and incompetence actually exists.

It left a bitter taste in my mouth, and I’m still wondering if anyone is really in charge or feels some sense of responsibility.

Take a look: