I hate to break it to you but the Federal Reserve and U.S. Treasury really don’t like you. They view most Americans as hamsters that serve only one purpose, to shop and consume. You will never hear them trying to push an agenda that would encourage Americans to be savers or manage their money wisely. How can they? They don’t do it so for them to say this would be hypocritical. In fact, their policy actions including dropping rates to near zero put us in a perilous situation that now is looking more and more like Japan’s lost decade. We have Ben Bernanke saying this to an audience in London:

“In my view … fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke said.”

This guy. He has already taken on over $2 trillion onto the books of the Federal Reserve with questionable assets and he is still asking for more. These are the actions of a monetary policy ideologue. He is going to have a tough time admitting that monetary policy is simply not helping anyone aside from his masters in the crony capitalist regime. The banks have done so well, that we even have Citi and Morgan Stanley merging brokerages. While people are being laid off left and right, we have a $2.7 billion deal going down. And make no mistake, Morgan Stanley is only doing this because the Fed and other government institutions are back stopping $306 billion in toxic assets. Bernanke then gives us another nugget of wisdom:

“Financial markets remain frozen partly because a “large quantity of troubled, hard-to-value assets” is still on institutions’ balance sheets, Bernanke said.

There are several ways to solve this problem, he said, all involving public funds.

The government could simply buy the troubled assets, or it could give asset guarantees and agree to absorb part of the prospective losses, he said.

“Yet another approach would be to set up and capitalize so-called ‘bad banks,’ which would purchase assets from financial institutions in exchange for cash and equity in the bad bank,” Bernanke said.”

Well, no matter what you do in your professional life, you are the owner/manager of your personal investment business. And that being the case, your start to 2009 means reflecting on a lousy 2008, which should lead you to one simple question:

Should I fire my mutual-fund manager?

Under most market conditions, a 40% annual decline would be horrible performance that is immediate cause for dismissal. In 2008, that kind of loss was average for equity funds. And while an equity manager who lost 30% or 35% clearly was “above average,” it’s hard to feel really good about those results.

When investments go down 40% to 50% and the market delivers a harsh reminder that diversification doesn’t work well in cyclical bear markets, human nature wants to blame someone for what went wrong. That puts every fund manager who delivered poor results — relative or absolute — on the chopping block.

And yet investors are clearly in deer-in-headlights mode, unable to escape this problem or solve it. The market is providing no real safe havens, and even past heroes and old standbys were taken for fools by this crisis. Top long-term managers like Dodge & Cox, American Funds, Fidelity Investments and many others got gassed in 2008; they were every bit as horrible and miserable as the rest of the crowd.

There weren’t any new heroes, either. Plenty of middle-aged investors can recall 1987 and remind you that Elaine Garzarelli — working for what was then Shearson Lehman — called the valuation bubble that mushroomed into Black Monday. Never mind that Garzarelli never proved to be more than a mediocre fund manager when she tried her hand at it — she was a bright light in a dark time, and investors found solace and profits in her advice before, during and after the crisis.

Today, it looks to the casual observer like Wall Street’s emperors are naked; you’ll have a hard time finding a Garzarelli-like figure, someone who earned stardom by getting 2008 right. Some perma-bears and newsletter editors helped a small-scale audience, but most Wall Street luminaries got 2008 wrong, which makes it hard to believe in them now.

Which brings us back to the question of whether you should fire your fund manager?

Traditionally, the most crucial question for evaluating a fund has been “Would you buy it again today?” Alas, market conditions actually pollute that query, since it is pretty hard to honestly answer that you’d repurchase a fund that just lost one-quarter of your money, even if that result was above average.

It is almost a given they are always wrong.

During raging bull markets they don’t look so bad, but in sideways and bear markets they should have stayed in bed. This year’s bear had them hiding under their desks.

Fortune in the December 2007 issue had 100 no-load, low-expense ratio mutual funds. Of the 100 their pick for the best 6 were Artisan International (ARTIX), BlackRock Enhanced Income (BRISX), CGM Focus (CGMFX), FBR Small Cap (FBRVX), (Manning and Napier World Opportunities (EXWAX) and Oakmark Select (OAKLX).

These were the crème de la crème yet only the bond fund, BRISX (-14%) outperformed the Standard and Poor’s 500 Index that declined 36%. The experts picked those that were down from 40% to 51%.

Do not allow your broker or financial planner to come up with the sick story that your account beat the S&P; by a few points. He might think that is good, but you lost money. He had no plan to protect your savings.

Many people were down 50%. Don’t they realize the account must make 100% just to get back to even? If any broker allows a customer to lose this amount do you think he is smart enough to make 100% to get back to “even”? Las Vegas will take that bet any time.

Brokers and money managers are not taught money management. As a former brokerage company owner I can attest to knowing few brokers who know how to sell. This is especially true for mutual fund managers. Unfortunately many mutual fund charters require 90% of customers money to be invested at all times. There are many times when the market is going down there not only should be no buying, but the fund manager should be in cash. The customer will not be making money, but more importantly he will not be losing money.

The secret of stock market success is not buying – it is selling. Wall Street does not teach brokers to sell. Any investor who had a mutual fund this past year will corroborate that statement.

Any fool can be a smart (?) broker during a bull market. Few brokers know how to handle customer money during a bear market. It seems the worst of the bear is over, at least temporarily. Those who held their positions this long should probably stay in during this next run up. A broker with a strong technical background should be able to see the next top and have his clients run for cash.

For some of these managers, stashing cash has proved a valuable defense against the economic downturn. For others, boosting cash was a prudent decision at a time when stock valuations were too rich for their liking.

Whatever the reason, such moves in many cases mitigated the steep losses that other funds suffered in 2008. Of the 50 best-performing U.S. stock funds that reported cash holdings last year, the average portion in cash was 22.9%, while the median amount was 15.4%, according to data from investment researcher Morningstar Inc.

“[Cash] is part of my bag of tools to help manage people’s money prudently and safely,” said Ralph Shive, manager of Wasatch First Source Income Equity Fund, which has about 15% of assets in cash.

“Holding cash is part of my style, based on the business cycle,” said Shive, who typically holds between zero and 5% in cash. “I’m looking forward to a time when I can put it back in. I think about it every week, but I’m not there yet. We’ve got some serious structural problems.”

The manager of one of the country’s better-performing funds decided in August 2007 to build cash positions.

Since then, said Monem Salam, deputy portfolio manager at Saturna Capital, which manages the Amana funds, not much new investor money has been put into stocks. As a result, cash holdings of the Amana Income and Amana Growth funds have swelled from single digits to about 30%.

“We’re not selling to go into cash, but we’re seeing money coming in and staying in cash,” the fund manager said, adding that the few buys he’s made have been in stocks he considers defensive.

There are still some warning signs for the markets and the economy, Salam said, including whether financial institutions have finished writing down assets, how large the U.S. deficit will be and the scale of job losses.
…
“Some managers do it right,” said Ryan Leggio, a Morningstar fund analyst, of those who have high cash positions. Leggio said Morningstar is “agnostic” about the strategy. He added that there are some “great managers we’ve long admired” who use cash heavily in their portfolios.

One of those managers is Rikard Ekstrand, co-manager with Bob Rodriguez of FPA Capital, a value fund that has just under $1 billion in assets. While the fund typically has cash holdings in the single digits or low teens as a percentage of assets, starting 2004 it began building cash, which peaked at 43.6% of assets in November 2007.

Ekstrand said that, as a value fund, FPA Capital has strict criteria about the stocks it chooses. “We just weren’t finding values good enough to deploy our cash,” he said. Still, the fund lost 34.8% in 2008 largely due to concentrated investments in energy stocks.

Investors do raise questions about when the cash levels jump, Ekstrand said, but the fund’s managers respond by explaining they can’t find the right opportunities.

“We hate cash, but we hate stocks that don’t fit our criteria even more,” he said. He added that the fund has been spending its cash “in earnest” since October, buying mostly energy stocks. Cash holdings have dropped to 32% of assets from 38% on Sept. 30.
…

Yet the fact that some managers hold large amounts of cash and still collect a management fee for stock-picking may surprise some investors.

“When an investor initially invests in a fund, they probably do expect it to be fully invested,” said Morningstar’s Leggio.

But some stock-fund managers say holding cash is not their responsibility. They’re hired to be fully invested in stocks, and if investors want a place to park cash they can go to a bank.

“Our institutional managers don’t pay us to manage cash,” said Jason Farago, spokesman at Lord Abbett & Co. “Cash looks great in hindsight, but you then run the risk of missing the rally when the market recovers.”

“We believe that over a period of time, our [stock selection] formulas work,” added Frank Ingarra, co-manager at Hennessy Funds. “It’s all about time in the market rather than market timing.”