Recently, I had an interesting conversation with a college graduate who was my doubles partner in a tennis match. He elaborated on how he’s been staying in touch with many of his fellow students and friends despite many having moved to far away places. Using email and social sites such as facebook.com make it a snap to keep personal connections going over indefinite periods of time.

This made me reflect back on my own graduation in 1973 (University of Kiel, Germany), when I was the only one to move out of the local area and on to the United States. Sure, for a while I kept in touch via snail mail (the only option) and infrequent visits during trips to Europe. Of course, over time these contact attempts faded so that after some 35 years of absence, I am pretty much out of touch and out of the picture.

I marvel at the fact how easy it is nowadays to stay connected which, if you are consistent, may pay some handsome dividends.

Al Thomas, author of the best selling book, “If It Doesn’t Go Up, Don’t Buy It!” had this story in last week’s newsletter, which makes some good points, that not only college graduates should be aware of and apply:

Every week I write something about the stock market – how to, when to and where to put your money and how to protect it from loss if you do. This week I want to say something very important
to the young folks about success. And you parents take note if your kids are still young.

People are assets. This kind of investment can really pay off.

Throughout anybody’s working life of some 40 years, there are bound to be many job changes and maybe even moves into totally different careers.

To keep in touch, as Al Thomas points out in his above article, is the smart thing to do since that type of networking should be a lifelong endeavor; not just for the potential business opportunities but also for the personal, meaningful friendships that may develop, which are always an asset that can’t be counted in dollars and cents.

As you know from previous posts, I am not one to put any credibility into forecasting, which is why I like to poke fun at those who, with serious faces, are trying to predict presidential outcomes or worse the closing price of the Dow on the last trading day of the year.

Joining this ever growing list of Wall Street fortune tellers can put you (temporarily) into the lime light because your forecast was close (lucky guess). This can present a real problem because if you then keep reading about your successful forecast, you may actually believe that you have special abilities; that is until reality strikes with your next guess being so far off that you are quickly removed from the “have to know” list.

I was reminded of that when I read Paul Farrell’s latest piece “Megabubble waiting for new president in 2009.” While I actually agree with some of his assessments, he goes way out on a limb by saying:

Flash forward: Real life, Washington, new leaders, a new Congress, old wizardry. Be forewarned: No matter who’s elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today’s housing-credit crisis, dragging us deep into a recession and bear market for years.

Ok, that’s a wild guess, although I can see that we may be facing a bear market far worse than the last one. To the casual reader, his entire story may sound pretty frightening, so remember, it’s just one man’s opinion. If he really believes in that forecast, however, I have to wonder what he might do with his “lazy portfolios” (Buy and Hold, of course), which are being promoted as the equivalent of motherhood and apple pie?

A “deep recession and a bear market for years” will not bode well for any portfolio that holds bullish assets. If his forecast comes to pass, I will report about the various consequences.

I have to admit that in my advisor practice, I always try to cover my back (investment wise) to expect unexpected events. As history has shown, those “black swans” have the ability to give your portfolio such a serious haircut that years of accumulated profits can vanish in a hurry along with a good portion of your principal.

This view may be based on my overly cautious nature but, given the economic environment we’re likely to be in for years, being prepared and ready to make a quick exit to the sidelines may prove to be the soundest of all investment decisions. What’s the alternative? Play ostrich and go down with the sinking ship?

I think not and lucky for me, even Oscar Wilde seemed to agree when he said:

“To expect the unexpected shows a thoroughly modern intellect.”

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

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

In a reversal from last week, higher oil prices and anticipation of a weaker economy took the starch out of the upside momentum for the time being.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now moved to +1.27% above its long-term trend line (red).



The international index dropped as well and now remains -3.21%% below its own trend line, keeping us on the sidelines.

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

On Wednesday, high oil prices and the Fed’s release of the minutes from its April 30th meeting sent the markets tumbling. At first, it appeared that the major indexes were able to withstand the relentless upward trend in oil prices but, when the Fed decreased its GDP growth forecast and increased its 2008 inflation and unemployment rate outlook, the damage was done and the bears took over.

It would now seem unlikely that further interest rate cuts are under consideration, at least not in the near term, which does not bode well for equities.

This does not mean that the current domestic up trend is derailed, but it is interrupted. We’re still above the neutral zone and will hold our positions subject to our trailing sell stop points. Here’s where our Trend Tracking Indexes (TTIs) stand in relation to their long-term trend lines:

Domestic TTI: +1.89%
International TTI: -3.41%

After the recent upswing, some type of correction is certainly in order as long as it does not mark the end of the trend. The fact that we can never be sure whether there is continuation to the upside is one of the main reasons that we ease into a buy signal with only 1/3 of our assets. If the trend continues, we will increase exposure; if it turns out to be a false signal, our exit strategy will get us out before major damage occurs.

In the meantime, I have ventured into some other sector ETFs showing strong upward momentum, which should act as an equalizer should the domestic market head further south.

My recent posts on the use of sell stops have caused some readers to ask a variety of additional questions. One of them came from Peter, who commented as follows:

First I want to say that I enjoy your blog very much. Recent articles on sell stops have brought up a question that has crossed my mind numerous times. Having used and read about “sell stops,” I would be interested to knowhow you arrive at your limit percentages…..i.e.: (7 percent)?

I have read of investors using anything from 3 or 4 percent to as high as 25 or 30 percent.I have never used a fixed percentage….rather a percentage based on thevolatility (guess work). I would like to refine this approach.

Using sell stops is not an exact science and neither is determining the size of the sell stop. Much depends on the volatility of the investment. I don’t deal with stocks but I now that due to higher volatility compared many mutual funds and ETFs, many investors work with stops in the 10% to 20% range. The exact number for an individual depends on his or her risk tolerance.

For slower moving mutual funds and ETFs in the general domestic and broadly diversified international markets, I use 7%. For faster moving ETFs that are exposed to sectors and countries, I have used 10%.

I know of several independent investment firms that use a flat 8% no matter which type of ETF they invest in. There is no hard and fast rule, except one. You need to give the market some room to move so that you don’t get stopped out at the slightest hiccup. For example, I have had a reader tell me that he was so afraid of losing that he has used stop loss points in the 3% to 4% area.

The result was that they rarely participated in a trend and had deal with constant whip-saws. From experience, I have found that 7% is a good range. It allows some room for market movement and, at the same time, limits my losses to an acceptable number.

For example, if I allocate 8% of portfolio value to a mutual fund/ETF and, if the markets head straight down after my purchase, I will lose around 7% (give or take) of my investment. Since I had only committed 8% to begin with, this means that my total portfolio is only negatively affected by -0.56% or so.

That’s a reasonable risk (to me), however, keep in mind that you may very well have 2-3 losses in a row, which would add up to a higher number. If that type of risk is too much for you, you should not be investing in the financial markets in the first place.

Yesterday’s review of the use of sell stops prompted one reader to post the following question:

When selling an ETF, should any type of limit be placed on the sell order, or just sell at market price? Buy and sell orders are new to me and I’ve just been buying at market price. I have not executed a sell yet, so any advice or links to information that anyone can share would be appreciated.

While this reader seems to be new to investing, he nevertheless brings up a valid point: What type of order should you use when purchasing ETFs?

My view is that you should always use a limit order and never buy at market price if you have that choice (and don’t need to sell at all costs). Here’s how I approach it:

First, I make sure that the ETF under consideration has a large enough average daily volume to accommodate my size order, which maybe a couple of million dollars. I want to be able to buy or sell without too much slippage in price. Depending on your order size, this may or may not be a consideration for you.

In may case, out of some 600 ETFs that I track, I have identified about 80, which have a high enough volume to facilitate my order at anytime. If my previous day closing price has indicated a buy for the next day, based on the current trend and momentum, then I am ready to place my order.

However, I usually watch the market activity for a couple hours or so into the trading day before taking action. Once I am ready to pull the trigger, I check the current price and place a limit order for that price. Even though I want to get onboard, I will not place a market order as it exposes me to, let’s call it, the vagaries of the market place. I may get a partial fill and may have to enter a different limit price, if necessary, to complete my order.

Again, the idea is not engage in any kind of scalping to squeeze out a penny in form of a lower price, but to participate in the developing trend.

As soon as my order is filled, I set up my tracking spreadsheet along with my trailing sell stop points. I update these every day and know where I stand at all times in regards to any Profits/Losses and proximity to my exit points.

Being clear and disciplined about the process eliminates emotional and irrational decision making, which will make your investment life a lot easier than working by seat of your pants.