Retails sales were the bad boy yesterday as the March numbers came in surprisingly weak.

Economists had been looking for an increase. Hmm, let me see, we’ve had job losses of over 500k per month for the past 6 months or so, and economists expected retails sales to pick up? Who is supposed to be doing the buying?

Maybe it was that wishful thinking again, that the economy is about to turn the corner later on this year. Well, I would not hold my breath or make any bets on that to happen.

Goldman Sachs was in the news again by reporting shockingly strong results. As I said last Friday, whatever banks report does not give me the warm fuzzies. Apparently, I am not the only one:

One analyst chalked up the performance to funds Goldman received from American International Group Inc. after the insurance giant was bailed out by the government.

That said, Greenhaus noted the outcome is what the government was looking for when it gave AIG the original $85 billion in rescue funds. “They wanted that money to filter through the global banking system and help get capital to financial institutions that were in need,” the analyst commented.

[My emphasis]

There you have it. It’s a very fine line between record profits and no longer being a viable enterprise.

I am relieved to see that taxpayer money contributed to Goldman’s survival and shockingly strong results, which can only mean enhanced bonuses for those lucky enough to be at the helm at this time. Looks like cronyism is alive and well.

Things looked a bit shaky on Monday morning as traders pushed the ‘sell’ buttons after a long Holiday weekend and sent the Dow down some 120 points.

Give credit to the financial stocks as the major averages clawed back and ended near the flat line.

Much attention was focused on GM as to whether they are closer to bankruptcy than previously assumed. Apparently, the automobile industry task force has in no uncertain terms told GM to prepare for a June 1 BK filing, just in case they can’t reach an agreement with UAW and its bondholders. Seems to me the thumbscrews have been tightened, but it remains to be seen if there is any adverse market reaction if a bankruptcy filing indeed takes place.

Markets typically react to unforeseen events; this one could be classified as the worst kept secret. There is more talk to possibly split the automaker into a ‘good’ and ‘bad’ company, with the good one retaining the successful automobile brands and the bad one being sold off over the next few years.

Either way, there will be some impact on the forthcoming unemployment numbers as a bankruptcy would certainly guarantee masses of direct and indirect lay-offs. I am not sure if this impact will be strong enough to have an effect on the current market rebound and put into question the preferred view that an economic recovery is looming on the horizon.

Recently, reader G.H. mentioned that he had difficulties when setting up a hedge position (see my free e-book on the topic) using mutual funds on the long side and ETFs on the short side.

Here’s the issue. You enter your (long) positions for your selected mutual funds. The order will be filled at the end of the trading day. How about your short position? If you enter it early in the day, and the market rallies, you’ll end up with a loss for the short position before your hedge is set.

To minimize any adverse market moves, I have waited with my short order until about 20 minutes before the market close to execute it. As luck would have it, the market rallied into the close that day, and left my now filled hedge position with a negative -0.75%. In the past, this type of scenario has at times worked in my favor, and I ended up starting my hedge position with a small profit. So you never can be sure.

Is there a way to avoid this kind of uncertainty and start out a break even point? Yes, there is, and here’s how I solved this issue.

I checked with my custodian’s (Schwab) trading desk, and they confirmed that I can fill an ETF position at very last moment via an order called “market on close.” This has been around a long time, and I remember using it on occasion some 15 years ago.

Since online trading tools do not feature this type of order, Schwab informed me that I can call it in, and they will process it at no extra charge. From hereon forward, this will allow me to set up my hedge at ground zero with no slippage due to market behavior.

I am not sure which other custodians offer this feature, so be sure to check with yours and post your findings in the comment section so that others can share in your experience.

Yesterday, I tried to shed some light on the question as to whether over time maximizing gains is a better strategy as opposed to minimizing losses.

I used the past 8 years of this century and concluded that in fact minimizing losses is a better long-term investment solution. The question remains how long should long-term be when used as an investment horizon?

If you ask the buy-and-hold proponents, you will immediately get the good old stand-by quote that equities have compounded annually at some 9% over the past 50 years. While that sounds great on the surface, it does not tell the entire story. It totally neglects the fact that you have to go through extreme portfolio pain (translation: sharp bear market drops) with years spent of making up losses in order to get to that 9%.

It simply is not reality to follow such a scheme, unless your parents set up an investment account for you when you were still running around in diapers and made regular contributions, which you later on continued without fail until you reached age 50. In that case, I can somewhat accept the 50-year buy and hold scenario.

Unfortunately, this is not how the real world works. I have witnessed it to play out more like this: A young person gets a job, and if he is lucky someone talks him into opening an IRA and making a regular contribution of $2,000 a year starting in his early 20s. Modest success lets him keep the contributions going and in his late 20s he’s got some $15k stashed away. Then all of a sudden, he’s got to have that new fishing boat—and there goes his IRA.

Years go by before he recovers from this “loss” and actually gets around setting up a new one. A few years later a hot opportunity lurks with a private placement—and there goes the IRA money again.

I am not making this up; I have actually witnessed this very example with clients many years ago. I have concluded that most people don’t really get very serious about retirement savings until they reach their forties. Add marriage, children and a home purchase to this equation and you can see why most people are getting delayed with retirement contributions.

From my experience, this scenario seems to be the rule rather than the exception. Given that, most people don’t really have much time to build their retirement assets. That means if your time frame to accumulate is shortened, you have to be very careful as to how you invest your money. You certainly don’t want to add insult to injury by losing big in a bear market and then spending years having to make up losses rather than adding profits.

That is the danger point many have reached. In only 9 years during this century, we have witnessed 2 bear markets, which have put many portfolios in the loss category century-to-date. This current bear is far from being over and the big unknown is how long will it take for many to make up last years devastating losses?

Yes, we’ve had a nice recovery over the past few weeks. This has helped those hanging in there with buy and hold to recover, but they still have a long way to go before they reach the break even point. If this market reverses and heads further south again, more portfolio pain will be inflicted.

My issue is that you are simply asking for trouble when looking at investment returns that are too far out in terms of time frame, because you won’t live long enough to see that 9% over 50 years. It makes more sense to me to not put yourself in that helpless situation of letting the financial markets run your life and determine your fate instead of the other way around.

Using trend tracking, or any approach that advocates the use of sell stops in some form, is far more preferable than being a mindless buy-and-hold investor. You simply don’t have enough time to wait for the rewards to come in.

Just ask any 60-year old investor, who has just seen his $1.2 million retirement portfolio slashed in half last year, how he feels about the long-term buy and hold rewards. You will not like his answer.

In last Saturday’s post, I talked about the current bear market rally, which struck a hot button with several readers. Ray left an excellent and detailed comment, which I will use as a basis for today’s post since it covers an important area of investing. Here’s a portion of what he said:

Patience is a virtue that has tripped up many an investor, including the author of this note over the years. As you look at monthly charts and see a rally since March 9, all of us wish we were invested to catch some of the explosive upside. Unfortunately, you might as well double down in Vegas, because (as you have written) there is no way of seeing the bottom until it is in and replaced by a solid trend reversal.

Ulli, your work allows us to do exactly that. I have recently checked some of the mutual funds I sold on your last sell signal in June and was not surprise to see some of them down as much as 60% from that sell signal, even with this rally—-you can only imagine how glad I am to miss this past rally for the opportunity to have saved my portfolio. All I need to do is figure how much of a return I would need to break even (if I had not sold them) to keep my hands off the BUY KEY—-But I am still as anxious and impatient as I have even been. I have found that over the years I have been able to make far more money by not loosing it in the bears, and I must give you the credit for allowing me to keep my emotions in check.

This brings up an interesting point. When investing, we all like to maximize our gains and minimize our losses. However, since this can rarely be done on purpose, the question remains whether one could be more important than the other? In other words, over a period of time, is it more critical to maximize your gains or to minimize your losses?

Reader Ray has found that not loosing it during a bear market has made a big difference to him, and I agree with that. To look at some real numbers, let’s review again a table I posted in my free e-book “The SimpleHedge Strategy:”

It shows the annual returns of the S&P; 500 for this century vs. a hedged buy-and-hold strategy, which I don’t advocate but which I have used in this example. As I have mentioned before, when comparing any kind of returns, especially the ones the buy-and-hold crowd publishes, you need to always include a bearish period. Otherwise, you might be misled to conclude that a certain mutual fund or ETF only heads for the skies.

This table clearly shows the good, the bad and the ugly when it comes to returns. If you are trying to maximize your gains, you have to be invested all the time, which will result in your portfolio receiving severe haircuts when the bear strikes. Of course, during years like 2003 and 2006, you’ll be running around pounding your chest by seeing your assets perform so well.

On the other hand, a strategy minimizing your losses clearly has merits when the bear hits hard and you are safely on the sidelines or in a hedged position.

It all comes down to the time frame you use for your evaluation. For example, looking at only one year to evaluate anything is short-sighted and does not give you enough data to base a decision on.

My experience has shown that a conservative strategy, such as trend tracking, which does not necessarily give you the highest returns possible during good times, but avoids the pitfalls of a bear market during sharp corrections, will be far superior over time. The above table, while representing only one period in history, clearly supports that view.

This goes along with a general theme in life in that it’s not how much money you earn, it’s what you keep that matters. It’s the same with investing.

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

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

An early sell off was reversed and the major indexes closed higher again. Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -3.84% thereby confirming the current bear market trend.

The international index now remains -7.23% below its own trend line, keeping us on the sidelines.