Forbes featured an article titled “Clever/Clueless,” which featured well known funds, which stand out for better or worse:

The market can make anyone look either clever or clueless in the short term, but some fund managers have been skilled enough to post market-beating returns over the last 10 years.

This fund has been spectacular at times: in 2001, when the S&P; 500 lost 12%, it gained 48%. In 2007 when the S&P; managed to eke out a total return of only 5%, it returned 80%. One caveat: With a highly concentrated portfolio of only 20 or so stocks, CGM Focus can also be risky. In fact, over the last 12 months the CGM fund had a -58.6% return versus -26.2% for the S&P.;



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There is just no right or wrong answer, although many investors are still looking for the one fund to be held through thick and thin.

CGM Focus, despite its long term stellar performance, turned out to be the worst fund during last year’s meltdown and should not be held regardless of market conditions. Losing over 58% in the past 12 months is just not acceptable and investors that were banking on this fund to protect them from market uncertainties faced a rude awakening.

Simply following long-terms tends, and taking evasive action at critical crossover points, would have avoided at lot of portfolio pain in 2008 just as it did in 2000.

Random Roger made some interesting comments in a recent blog post regarding asset allocation appearing not to have worked during last year’s market debacle:

In my opinion total reliance on some sort of long standing formula is simply lazy (talking about people who get paid to manage assets). Every asset class has fundamental dynamics that change in some ways over time and over reliance on some sort of static allocation model ignores what should be intuitive; nothing stay exactly the same forever.

I have very little sympathy for a lazy advisor who bet on the status quo and was let down. There can be no guarantee that any action taken in advance can be successful in avoiding pain but I do not know how you tell a client “I never saw this coming and it never occurred to me to try to do anything to protect your assets.”

My view is that it has not been just the lazy advisor that failed but the entire asset allocation approach to investing implemented by some 99% of all financial institutions. Asset allocation by definition is supposed to balance out declining holdings by having another portion of the portfolio go the opposite direction.

While that may have worked in the past during times of global stability, this century-to-date has shown that old rules no longer work. In the era of instant communication, along with instant everything else, the world has become a smaller more connected place. The consequence of that is that there are few areas that could be consider sheltered and oblivious to world events.

The countries that matter, from an industrialized point of view, will be instantly affected by events shaping the world. As a result, you no longer can construct a portfolio in such a way that it protects from the unknown by attempting to isolate parts of it. Nowadays, all parts are part of the big picture and move pretty much in tandem.

To me, asset allocation in the conventional sense no longer is a valid option as both bear markets over the past 9 years have clearly shown. If you are an asset allocation fan, that’s fine, but modify your theme to include an exit strategy, which will protect your portfolio in worse case scenarios.

As I wrote in yesterday’s post, the current rebound has the potential to make many investors complacent. Economic circumstances are such that bullish trends can easily change into bearish ones and vice versa. Be on guard and prepared to deal with either scenario.

In “S&P; 500 Rally Poised to End; Buy and Hold Still Bad Advice,” Mish at Global Economic Trends revisits the fact that buy and hold remains to be a questionable long-term form of investing.

I want to hone in on his featured Nikkei monthly chart:



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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.

This chart clearly demonstrates what I have been saying all along. You can have a tremendous rally off any bottom lasting several years, which will do one thing for sure: Cause investors to become complacent and confident that a new bull market is here to stay.

The subsequent consequences of a burst bubble are obvious and those not paying attention are bound to participate in the next leg down (as the chart shows) ending up with years of wasted investment efforts.

While I certainly can’t be sure whether we will follow the lead of Japan and duplicate two lost decades, I can make sure that I will not follow the trend down whenever it reverses. Yes, that will include some false signals from time to time, which is a small price to pay for not going down with the masses.

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

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

Renewed optimism pulled the markets out of the doldrums of the past four weeks. All major indexes gained sharply.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +3.07% 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 +10.82%. 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.

There’s no question as to the catalyst igniting yesterday’s rally. It was Intel’s bullish earnings report followed by strength in energy and financials.

The gains were the best for the Dow and Nasdaq since the end of March and for the S&P; 500 since the beginning of April. This now marks the third straight day in a row that the indexes have closed higher.

Expectations rose again that an economic recovery may actually start this year, a view that the Federal Reserve supports. However, I am not sure if this enthusiasm will eventually clash with the Fed’s latest economic projections that pegs the national unemployment rate at 10% this year and hitting 10.6% in early 2010.

While unemployment is a lagging indicator, a lack of improvement will eventually affect corporate bottom lines, since unemployed people tend not to buy new cars and houses or go on wild shopping sprees to spend now and pay later.

Be that as it may, right now the markets have moved higher and so have our Trend Tracking Indexes (TTIs), which are positioned as follows:

Domestic TTI: +2.71%
International TTI: +10.45%
Hedge TTI: +0.79%

We are holding on to our hedges and a few long positions. I will jump back into the international arena once upward momentum has been clearly established, which means I will wait until the old highs have been taken out.

The hunt for better portfolio protection during market meltdowns such as 2008 continues to go on.

MarketWatch says in “Fear Factors” that investing in the VIX (Volatility Index) could protect a portfolio in volatile markets:

Stock investors who spread money across other markets such as commodities and real estate didn’t get much shelter from 2008’s meltdown. But tapping the market’s “fear gauge” might have helped.

Szado is not necessarily suggesting a buy-and-hold strategy with VIX. “Since long volatility positions are expected to earn negative excess returns in the long-term, an active approach rather than a passive long volatility exposure may be appropriate,” he said.

While that is all very interesting, it is far too complicated for an average investor to implement the use of the VIX index. The goal is to avoid sharp market drops, and you can do that much easier by being out of the market when the long-term trends head south.

Even the SimpleHedge Strategy, which I advocate, would have been far easier to implement with better results than attempting a sophisticated approach involving the VIX. While this may work for some, most people, who I talk to in my advisor business, like to keep things simple and understandable. And that is how it should be.