Reader Ian is trying to decide whether to swap one mutual fund for a better performing one. Here’s what he had to say:

Thanks for answering my previous questions. One of my two funds has not been in the top 100 domestic mutual funds for the last two weeks (WPVLX). Would it be counterproductive to chase momentum and move my money to one of the higher M value funds? I’m looking at BPTRX.

Just because a fund moves out of the top 100 positions does not mean it should be automatically replaced. Let’s take a look at a 1-year chart and compare both funds along with the S&P; 500:

While BPTRX indeed is currently performing somewhat better than WPVLX, it is also a lot more volatile as you can see by the drop off during January’s correction (red arrow). This becomes even more glaring when you look at a 2-year chart.

With the market having advanced as much as they did, you want to hold funds with a little less volatility to better survive any inevitable pullbacks. Given that, along with only a moderate performance difference, I don’t see justification for a swap. Additionally, both funds have outperformed the S&P; 500 for the period shown.

Assuming that you have held WPVLX for a while, you would also start all over as far as the early redemption fee period is concerned, if you were to make an exchange. Or worse, if you are dealing with assets in a trading restricted 401k account, you might trigger other restriction issues.

The key is to limit trading activity and stay with a fund that is clearly on track and let the trailing sell stop tell you when it’s time to exit and lock in your profits.

Disclosure: No positions in the above funds.

One reader continues his offensive posting battle of buy and hold being a better choice as trend tracking. Yes, there have been numerous studies supporting his viewpoint, as there have been many studies making the case for trend tracking.

He further quotes an example of 3 mutual funds that have low fees and have doubled over the past 10 years. These funds are PTTDX, BERIX and PRPFX. It was not clear whether he actually had owned these funds for the entire period or if his assessment came with the benefit of hindsight—big difference.

I plotted these funds and compared them against the S&P; 500, and they indeed outperformed the index by a wide margin, although at a quick glance it appears that only PRPFX doubled in value:

Nevertheless, if you actually had held these funds, you did better than most investors, including the majority of mutual funds, and you outperformed the S&P; 500. Congratulations!

Of course, you had to endure some severe draw downs as the last 2 bear markets wreaked havoc. And that is my point. Most investors can’t stomach seeing their portfolios drop 50% in value just as they are getting towards the end of their working years.

I have emailed with and talked to thousands of readers and investors who were financially and emotionally devastated by what happened during these past 2 bear markets. They could care less about the worn out quote that in the long term the market will always come back—by then, they may no longer be around.

Avoiding bear markets to me is crucial, but is only an alternative. If you are comfortable with hanging on to your investments, then fine. This not a battle of right or wrong, it is a matter of preference, which I elaborated in “It’s All About Personal Choice.”

Disclosure: We have holdings in PRPFX but not the other funds discussed above.

The WSJ reviewed the pros and cons of dividend ETFs in “Dividend ETFs Beckon Income-Starved Investors.” Let’s listen in:

Exchange-traded funds that focus on dividend-paying stocks trailed the market by a wide margin in 2009, but they may attract yield-starved bond investors who are also worried about the prospect of rising interest rates.

“There is no free lunch in the market, so the largest dividend yields tend to come from stocks that have fallen substantially, showing that investors do not believe the payments can be maintained,” Mr. Kay wrote in a recent report.

Whether some of these high dividends come from companies that have fallen or whether their stocks will eventually pull back sharply, does not really matter. In the aftermath of the burst credit bubble, with many long-term effects still being an unknown, the only way to guard against severe losses is to treat dividend ETFs just like you would any other investment in terms of having an exit strategy.

I discussed this necessity for bond funds, and dividend ETFs are no exception. If you are of the opinion that the bear of 2008 has been successfully conquered, then you can simply hang on to your investments. If, on the other hand, you believe like I do, that more moves in out of recessions are on the horizon over the next 10 years, then you must protect yourself against these types of cycles.

In my view, market volatility is here to stay. It’s questionable whether, after the next downturn, we’ll be so lucky to see a repeat rebound of the strength we’ve witnessed last year. Let’s not forget much of it was stimulus induced and supported by zero interest rate policy, a theme that can’t simply go on forever.

I prefer playing it safe by tracking trends and using sell stops. Why gamble and take a chance?

Disclosure: We currently have no holdings in the ETFs featured above.

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

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

Optimism that the economic recovery continues to be on track supported the major indexes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +4.41% 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 +7.20%. 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.

I am trying to politely turn a hateful comment regarding my post “Mutual Fund Fee Makeover” into a worthy response. The anonymous comment in question came from someone who in no uncertain terms stated his dislike for “dreaded” mutual fund managers or investment advisors for that matter.

The basic question was as to how a mutual fund manager differs from an investment advisor.

As I have posted before, mutual fund companies offer the investing public the opportunity to purchase an investment, which is clearly defined in terms of objective. Fund managers are expert stock pickers with large resources available to select those issues which they think will prosper best in the current economic environment.

It is a truly daunting task and any manager is only as good as his last call, which is why the average longevity of a manager is only around 5 years. This set up along with the mutual fund charter requires that an equity mutual fund itself has to be invested at all times, so that the product is available for sale to the public.

That in itself presents a problem in that this causes a commitment to be invested during bear markets as well. As we all know, holding any stock (or mutual fund that invests in stocks) in a bearish environment, will cause severe losses depending on the severity of the downturn. We have seen two major bear markets during the past decade with the result that most investors experienced negative returns.

Again, I respect what mutual fund managers are trying to do given the limitations of having to be exposed to the market at all times. I would not want that job, nor could I do it.

As an investment advisor, I make it my business to indentify the long term trends and attempt to stay in the market (mutual funds/ETFs) when it is trending up and out of it when it is trending down. Coupling this with a trailing sell stop discipline lets me control downside risk; this has resulted in the prevention of the brunt of the bear markets in 2001 and 2008.

By having a definite plan in place to enter and exit, I gain some means of control of my (and my clients) investments in an environment of many unknowns and much uncertainty. As we continue to slither along the dark side of this boom and bust cycle, we have entered unchartered territory where anything can happen at a moment’s notice.

In my view, not being prepared to deal with the inevitable consequences of this credit bust and enormous debt overhang will result in another serious portfolio haircut down the line. I for one am not willing to be part of it.

Why buy gold when platinum is rarer, dearer and far more useful claims Forbes in “Platinum: Like Gold, Only Better:”

Gold might have history on its side, but when it comes to investing in precious metals platinum arguably makes more sense. Platinum is rarer, dearer and just as pretty. What’s more, unlike gold, it has an important industrial use in automotive catalytic converters and LCD TV screens. If that weren’t enough to recommend the white metal, the launch of new exchange-traded funds makes platinum easier than ever to buy and sell.

The ETF Securities Physical Platinum Shares (PPLT) fund is similar to the popular gold bullion SPDR Gold Shares ETF (GLD) in that it buys and holds raw bullion (safeguarded by JP Morgan Chase (JPM). Its shares track platinum’s spot price. You’ll incur lower transaction and storage fees in holding the ETF (annual expenses: 0.6%) than in holding and storing your own bullion bars.

Indeed, while this platinum ETF has been volatile (just like gold), it has been a better performer during the few months it’s been on the market. Take a look at the comparison chart:



Despite its short life span, volume has already soared to a daily average of some $25 million making it a feasible choice for most investors. If precious metals are of interest to you, be sure to read the entire link.

Disclosure: We currently have positions in GLD but not in PPLT.