ETF/No Load Fund Investing: Are There Valid Reasons To Sell Now?

Reader Nitin sent me an article from BusinessWeek called “Five Reasons to Sell, Sell, Sell.”

It lists five of the biggest threats to the current stock market rally, which include:

1. Earnings

2. Consumer spending

3. Inflation

4. Subprime and housing

5. Shiny happy investors

All of these are items which I’ve discussed in various posts and comments, and every one them has the ability to derail the current bull market. Some have actually contributed to last week’s sharp pullback. If you are a casual reader of these types of articles, you may be prompted to liquidate your entire portfolio, and possibly watch the major indexes resume their upward march for another 6 months.

And that is the problem with these stories. They may be correct in outlining all of the culprits that will always affect markets to the downside, but that does not mean such an event is imminent.

This is why I continuously harp on the fact that these stories have no value when it comes to actually making a decision regarding your investments. At the risk of sounding like a used car salesman (no offense), stick to watching the major trend and follow your trailing sell stop points. Those are real numbers you can use to improve your decision making process.

ETF Investing: Enlightening Facts You Need To Know

Don’t let it be said that Morningstar doesn’t have a sense of humor. A recent article called “10 Surprising ETF Facts” covers an array of ETF facts ranging from amusing to downright shocking.

For example, did you know that 30% of all domestically listed ETFs have been launched in the last 6 months? That’s a scary thought I touched on before, because some kind of track record is needed before you can make an intelligent decision whether an ETF is suitable for current market conditions or not.

Here’s another good one: The average expense ratio of ETFs launched in the last 6 months is 0.67%. The average ratio for ETFs launched before December 2006 is 0.45%.

And you really believe that there is no inflation?

Facing Portfolio Reality

With the markets having been in a rally mode for the past 9 months, some of your no load fund/ETF holdings are most likely showing different gains. If you listen to some of the media, however, you should sell your laggards and load up on the winners.

While it’s certainly advisable during an uptrend to sell an underperformer (I have done that too by liquidating SWHEX), it is not smart to swap a large portion of your portfolio for the latest and greatest no load fund or ETF. While it may be tempting to play performance catch-up, this can be a two-edged sword. Just because your best friend was fortunate enough to pick better performers than you did last year, doesn’t mean that it is the right thing for you to do at this time.

Why?

For one, when the market turns, and it will, those top performers will be hardest hit and can turn your slowly accumulated gains into losses. Two: if the market defies all odds and continues its upward path, you may see some sector rotation due to the ever changing economy, which may cause some of your laggards to pick up some steam.

So, when is the time to make major adjustments? If you’re following my trend tracking approach, the best time is at the beginning of a Buy cycle. That’s when you need to determine your risk tolerance before you select the funds/ETFs to be invested in.

Remember, this is not a life or death decision in that you’re not holding these funds forever (as you might with Buy & Hold). Your plan should be to select those with a focus on an average Buy cycle duration, which historically has been some 14 months.

I have to say that in my advisor practice (with the benefit of hindsight) my selections last year were very much on the conservative side, and I have made some adjustments to account for stronger performing sectors. However, trying to revamp an entire portfolio at these lofty levels, by shifting into a more aggressive mode, would be a disservice to my clients and would definitely not be in their best long-term interests.

The “Las Vegas” Effect of ETFs

ETFs have been one of the great additions to the investment arena over the past few years. In my advisor practice, I use them along with no load mutual funds to construct our trend tracking portfolios.

However, new ETFs are being introduced at an alarming rate. This year, almost 100 new ones have been brought to the market. It’s getting to a point where every sector gets sliced and diced into more micro sectors.

Some of these new micro ETFs are small, have low volume and are extremely volatile. In other words, investing in some of them will be no different than you placing bets in Las Vegas, except you are saving on the travel costs.

Morningstar just came out with an article on the subject called “Fund Frenzy: ETFs Out Of Control.” You can read the entire story at:

http://articles.moneycentral.msn.com/Investing/Morningstar/FundFrenzyETFsOutOfControl.aspx

Just because there are hundreds of ETFs available, which are all competing for your investment dollars, doesn’t mean they are right for you. Use common sense and the same guidelines you would when selecting a no load mutual fund.

No Load Fund Investing: How Important is a Fund Manager?

This question is like a two-edged sword, and I am bound to step on somebody’s toes. I think the most important issue in answering that question is what type of investment approach you are using.

If you are one of those Buy-and-Hope followers and always in the market, then, by all means, you want a fund manager with a good track record. Because you hope that he has a way of bailing you out during times of market turmoil.

Dream on! When a bear market hits, such as we’ve seen from 2000 – 2003, all equity funds (and others) tend to go down with utter disrespect to the fund manager in charge.

If, however, you use a trend tracking approach, such as I advocate, then the fund manager is not that important. When you analyze funds based on their momentum figures, a fund manager’s strong performance will be reflected in the underlying price of the fund. It will move up in the (momentum) ranking food chain making it a candidate for a buy.

The bottom line is, whether a manager leaves a fund or not, has no effect on my decision making process. So, when I read articles in MarketWatch that report a change in fund management and ask the investors to be patient and give the new guy a chance, I have to chuckle and wonder who really wrote that piece.

As I said above, in bear markets all equity funds go down. However, that’s not entirely true. One of my readers pointed out a no load fund, which bucked the trend and put on a super performance. In tomorrow’s post, I’ll tell your more about it.

No Load Fund/ETF Tracker updated through 4/13/2007

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

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

Sideways to upward bias pushed all major market indexes slightly higher.

Our Trend Tracking Index (TTI) for domestic funds moved higher as well and now sits +4.60% above its long-term trend line (red) as the chart below shows:

The international index rallied as well and has now moved to +9.37% above its own trend line, as you can see below:

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

SubPrime Loan Solution: Let’s Bail ‘Em Out

Last week’s article on the latest in the SubPrime loan arena really irked me. Turns out that consumer groups called on congress to revise the current bankruptcy law to save the homes of borrowers drowning in the rising tide of foreclosures.

I am certainly a sympathetic person, but that smells like another government bailout to me. Shouldn’t a potential homeowner applying for a loan have some responsibility as a fully functioning adult in the wealthiest country on earth to know what he is getting into when purchasing a piece of real estate?

It just rubs me the wrong way. If this bailout comes to pass, surely it could be expanded. Maybe if you as a mutual fund investor lost money during the last bear market, you should be able to apply for a refund?

Of course, I am being ridiculous, but what’s your view?

ETF News: When a ‘Buy’ Could Be A ‘Sell’

A few days ago, I read a short piece in the WSJ about the benefits of ETF investing. No news there; but the story went on to say that many investors who follow analysts’ “Buy” ratings could be in for a surprise.While my preference is the use of momentum figures, regardless of what anyone else thinks or says, making your investment decisions strictly by following analysts “Buys” could have an opposite effect.

If an ETF, or any other security for that matter, has an excessive number of “Buy” ratings, it could very well mean that most of the buying has already been done and the upward momentum could reverse causing you to buy at the high.

Just be aware that when everyone screams “buy”, especially the analysts, the market top is close at hand

From The No Load Fund/ETF Files: Can Your Portfolio Weather An Economic Downturn?

It has happened again. Every so often a new book appears on the market that depicts impending gloom and doom. The latest one is Peter Schiff’s ‘masterpiece’ called “Crash Proof: How To Profit From The Coming Economic Collapse.”Schiff, who owns an investment company, has been predicting bad economic things for a while and has been frequently quoted in Orange County (California) newspapers. He took his prediction of a severe real estate collapse to heart a few years ago, sold his house and relocated somewhere in the mid-west, where he is now ‘renting’ and ‘raving.’

In an interview with MarketWatch he says the severe real estate downturn is underway and the “mother of all recessions” is to follow.

While I don’t pay much attention to any kind of prediction, it brings up the question as to what you can do to weather an economic downturn, and a subsequent bear market, should both ever come to pass.First, a downturn does not start with a bang overnight. It starts with a slow deterioration of stock prices followed by the occasional rally attempt. You can be fairly sure that, once prices have been pushed down and the media (or your broker) tells you this is ‘a great buying opportunity,’ the party will be over.

Second, if you follow my trend tracking methodology, and monitor your trailing stop loss points, you are automatically limiting your downside risk. There is no need for you to guess what the markets might do. If you get stopped out, great; it’s time to take profits and look for other opportunities. Our momentum tables will tell us if there are areas that buck the recession that might offer investment possibilities.

Bottom line is: Stay away from any kind of predictions. Wall Street is littered with dead bodies who at one time in the past decided that they could look into the future.

Smart Investing: Getting Rid of a Bad Annuity

Ok, I admit it—I am biased when it comes to annuities. My generally negative view is not based on my own experiences but those of clients and a good portion of my newsletter readers (even though their preferred investments are no load mutual funds and ETFs).The stories I hear are very similar in that most people I have talked to complain about them in regards to performance, fees and ridiculous surrender charges.My first question usually is: “Did you go out and buy this annuity or did someone sell it to you?” The moment of silence on the other end of the phone is a dead giveaway that the former didn’t happen but the latter did.

While annuities certainly have a place, most investors are not well informed, or are even being even misinformed, about the pros and cons of such a commitment. For example, one of my retired clients, who is traveling across the U.S. by motor home, called to tell me that at his last overnight rest stop, annuity salesmen were putting on a seminar for seniors and that many signed up. He did too, but changed his mind after discussing the presented information with me.

While this may be offending to those working in that industry, it’s worth noting that high up front commission can very easily compromise the integrity of a salesperson. My suggestion is that if you think an annuity is something for you, do your own research and buy one that has no surrender charges.

While some of my clients have an annuity with my custodian (Schwab), I have also heard good things about “Ameritas Direct.” I have no relationship with them, but you can find out more info at their site at:

http://www.ameritasdirect.com/

However, if you’re stuck with a bad annuity, what can you do? While this is not my specialty, here’s an article by Kiplinger on “How to Unload a Bad Annuity:”

http://www.kiplinger.com/retirementreport/features/archives/2007/01/Cover_Jan2007_03_01.html

If you’ve had a good (or bad) experience with an annuity of any kind, feel free to comment. You can even do so anonymously, if you want to maintain your privacy.