At first, I couldn’t believe it. But as more calls and emails came in over the past few months, a pattern seemed to emerge. Apparently, there really was some truth to it.

What am I talking about? I am referring to many investors’ disenchantment (too nice a word, really) with their brokers who kept them in the market during last year’s meltdown.

Phrases like “XYZ Company lost me so much money” are common. Anger still seems to run high and upon my question “why did you not tell your broker to sell” I have been getting this most stunning answer “they refused to sell my positions.”

What?

These are not isolated comments but have come from dozens of readers and new clients, who had conversations with their advisors/brokers during various times of the 2008 crash and reported that they were refused to have their holdings liquidated.

To me, that’s an absolute shocker and underscores the total arrogance so pervasive in the financial services industry along with total disregard for a client’s wishes. That begs the question “whose money is it anyway?”

It seems to be a conveniently forgotten fact that the client owns the money and as advisors we’re here to serve him and act in his best interest. If a client wishes to temporarily go with his gut and against the convoluted asset allocation scheme, because he can’t stand losing any more money, should we not oblige?

Of course we should; a client’s comfort level with whatever an advisor/broker does should be priority one, and not adherence to an outdated model that does not take into consideration any bear market scenarios.

Having had this discussion with a new client, I was informed that he had to sign a statement when using Fidelity’s management services that would not allow him to place any trades himself. In other words, he was stuck with the advisor’s allocation plan until the agreement was cancelled.

I find this unacceptable. If you are the owner of an investment account, you should always have the right to supersede the advisor’s authority and be able to place trades. If you have a good relationship with your advisor, and are in agreement with his approach, there is not need to use that right, but you should always have it. At least that’s how it’s done in my advisor practice.

Lack of respect for a client’s wishes seems to be a common denominator in the financial services industry, especially when large commissions are at stake. While earning commissions is an honorable way to make a living in most industries, it has failed miserably in the financial arena. The prevailing thought with many (not all) commissioned brokers is how to generate sales at all costs, and not what might be in the best interest of a client.

The old adage that “(commissioned) brokers are like pigs at a trough; the pigs may change, but the food is always the same” still holds true today.

For most of the past week, I have discussed sells stops and responded to various reader questions. Here’s David’s comment:

I enjoy reading your blog and have three ETF questions for you.

1. Since these funds are twice as volatile as the indexes they track, should my stops be 7% or 14%? (At this point I would make over 35% on all three at 14%).

2. Since I invested in several lots should I sell all at my stop point or have several different stops, perhaps tied somehow to the price of each lot and number of shares?

3. If your answer to question 2 is sell all and I get whip-sawed, should I get back in incrementally when a new high is reached or reinvest the entire amount from the stop sale and then get back on my monthly investment program?

I do not use Ultra ETFs personally or in my advisor practice. The reason is the added volatility, which makes it more difficult to apply the concept of trend tracking along with trailing sell stops. However, since you asked, here’s my response to your questions:

1. You have a nice profit built up and are obviously aware that it can evaporate in a hurry if the market turns. A common belief says that the higher your unrealized gains, the further back you can trail your stop loss points. That may apply to some but not to others. Your risk tolerance definitely comes into play here. If you’re comfortable giving up 14%, then that’s what you should do. If not, use 7%; you only can make that decision.

2. Since all of your positions have rallied, there is only one high price from which to measure the drawdown to your eventual sell point. When a sell stop gets triggered, I liquidate all holdings of that ETF.

3. Since you are using leveraged ETFs, I personally would use the incremental buying process and ease back into the market in 1/3 increments or whatever percentage you are comfortable with.

You have experienced how leverage can work in your favor. Do not become complacent thinking it will always work this way, because it won’t. Nevertheless, you took advantage by using the tools available to maximize your returns during this bullish rebound. Congratulations!

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

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

Sloppy and choppy was this week’s theme as the major indexes lost around 2%.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +7.74% 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 +14.69%. 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.

Yesterday turned into one of those classic “buy the rumor, sell the fact” situations as the Fed’s unchanged stance on interest rates failed to inspire the buyers.

Actually, the bears took over, and the major indexes headed straight south, although the losses were moderate given the size of the rally since the March 09 lows.

The initial reaction after the Fed announcement was positive, as the chart shows, but disappointment over lack of bullishness in the language disappointed traders and off the highs we went.

Our Trend Tracking Indexes (TTIs) retreated slightly but remain firmly in bullish territory:

Domestic TTI: +8.30%
International TTI: +16.82%
Hedge TTI: +3.32%

We will now have to see if the pattern of the past few months repeats itself, meaning that the moment the indexes give back about 1%, buying sets in, and we’re on our way to higher highs.

Sooner or later this trend will come to an end and reverse. Be prepared by having your trailing sell stops in place so that you can exit at a moments notice, should market behavior dictate such action.

Reader John had this comment regarding my review of PRPFX last Saturday of:

That said I have not always been this enthusiastic about it (PRPFX). The fund’s expense ratios were unacceptably high for a long time and have only recently dropped into a range I am prepared to support. (I refuse to buy mutual funds with expenses greater than 1%. There are very, very few that are worth it and for those that are, one can generally find cheaper alternatives.) You can build your own Permanent Portfolio with funds that are generally less expensive, although this is more labor intensive as you have to do all of the frequent rebalancing yourself.

One part of John’s comment reminds me of what I have heard from many investors over the past 20 years in that they look at mutual fund/ETF expense ratios as the most important factor in selecting an investment.

This seems to be some leftover attitude from the buy and hold type of investing. Granted, if you hold any fund for years without ever sidestepping any bear market, reducing the cost of that investment makes a lot of sense.

However, when you are in trend tracking mode, upward momentum followed by performance is the most important ingredient for success. After all, who cares what the charges are if the rewards far outweigh the expense.

Case in point is what happened after the 2000 bear market. We re-entered in 2003, and one of my fund selections was the Nicholas Applegate fund. It absolutely exploded by gaining over 60% in 3 months. If I had looked at the expense ratio first, I probably would have not selected this fund.

The lesson learned is that’s it’s not worth trying to save nickels and waste dollars in the process.

Reader MD was interested in mutual funds that automatically protect any profits made. He had this to say:

I am interested in No Load mutual funds, which use hedging strategies like shorting or buying options to protect the gains realized.

Don’t I wish that these types of funds exist. While all mutual funds turn over their holdings several times a year, they will not accomplish what you have in mind.

The only types of funds that attempt to make money in both bull and bear markets are long/short funds. I track some of them in my data base, but do not publish the results, since they have been less than impressive as far as long-term performance is concerned.

Year-to-date, they have been doing fairly well as you can see from the following table:



I have found that these funds tend to perform better during bullish periods than during bearish ones.

Take a look at this 5-year chart comparing SWHEX compared to the S&P; 500 (the green line represents the 200-day M/A):



As you can see, during this period SWHEX tracked the S&P; 500 fairly well, but still went down sharply as the bear struck with full force last year. The drop was considerably less than for the S&P; 500, but did not offer the type of protection that you might have expected.

You still would have been better off stepping aside via trend tracking in 2008 than taking a chance with a long/short fund. I hate to tell this, but a fund that automatically gives you the best of both worlds (locking in gains in bull and bear markets) simply does not exist.

You have to add your own exit strategy to any of your holdings to make sure you are protecting your portfolio from too much downside risk.