If you had been given proper advice and direction as a 20-year old, opened a retirement account and never let any earthly desires interfere with you maximizing your contributions for the next 45 years, you would be a happy 65-year old sitting on a portfolio worth several million dollars.

Unfortunately, life does not work that way for most of us. Things happen and the best laid plans can be unraveled in no time at all. That’s what happened to Whit J.

Whit and his wife raised 3 children, who all went to college and ended up with great careers. Two divorces later, Whit suddenly found himself in his mid 50s with some cash in the bank, but no retirement account.

Sure, he could set up a Sep-IRA or a small 401k, but the contribution limits would not get him to where he wanted to be at age 67. However, there is a way that will allow him to make large contributions and give him a terrific tax write off at the same time.

Whit’s saving grace is that he single handedly runs a small consulting firm which grosses over $300k per year. Being single, that means that the IRS takes a huge bite out of his earnings.

He would be a perfect candidate for setting up a Defined Benefit Plan (DB). I ran the numbers via my custodian/actuary and the result showed that Whit qualifies to make an annual maximum contribution of $150k, which would be a write off on his taxes.

Whit may decide that $150k is too much considering his lifestyle/business obligations, but $100k is more in line with what he feels he can contribute annually over the next few years. This will give him the opportunity to play catch up and still build a nice nest egg for his eventual retirement.

If you are in a similar situation, you might want to look into this type of plan. There are some strict requirements compared to conventional retirement options. Here are some of the important ones:

1. Once you commit to an annual amount, you are required to contribute the same every year for the duration of the term.

2. You are supposed to earn a return of at least 6% per annum. If it’s less, you need to make up the shortfall.

3. If your business is slow, you are allowed to make your contribution from other sources (savings, loan, etc.)

4. Defined Benefit Plans can be managed by an advisor

This type of DB plan can also work for any high income employee over 50 years of age, as long as he doesn’t have an existing retirement account of any substantial means. Keep in mind that there is more to DB plans than outlined here. I wanted to give you an introduction about its existence; if you have more questions feel free to contact me.

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

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

Despite higher oil prices and interest rates, a well received unemployment report supported the major average during the last trading day of the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs is now positioned +4.28% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +8.42% above its own trend line, as you can see below:



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

Just found a story in MarketWatch titled “An active manager can offer protection,” which features an interview with Dan Wiener, editor of the Independent Advisor for Vanguard Investors.

It’s a rehash of the battle of the indexing folks against those preferring to use actively managed funds. Dan said that “fund buyers should be looking first for great management — and particularly management with a history of protecting shareholders during down markets — so that they have the confidence to stick with a strategy in all conditions.”

He then added that “one of the flaws to an indexing strategy is the downside protection, with many investors finding it hard to ride out market downturns when they are bearing the full brunt of the fall. Good managers make up for their additional cost, by providing a shield against those kinds of losses.”

Huh?

I am not making this up. Where was this guy during the last bear market? Read that again: “fund managers provide a shield against (bear market) losses?” Has he not looked at any chart to see how Fidelity equity funds fared during the period of 2000 to 2003?

If you held any Fidelity funds during that last bear market, please tell me that I am wrong and that you actually owned such a fund where the manager “provided a shield against losses.”

He actually mentions a couple of funds (with the benefit of hindsight), namely VSEQX and VMGRX. The latter wasn’t around during the bear market, so let’s look at VSEQX compared to the S&P; 500:

The arrows indicate the approximate range of the bear market. One thing that is glaringly obvious is that VSEQX was a poor performer at that time when compared to the S&P; 500. Subsequently, it gave back less during the bear market. The past 5 years, it has barely kept up with the S&P.;

My take on this is still the same: This should not be a battle as to whether indexing is a better approach than using actively managed funds, because both will lose in bear markets to varying degrees. Use a combination of both, and apply the trend tracking discipline, which at least gives you a fighting chance to keep most of your portfolio intact when the markets head south in a big way.

As per request, I have updated the ETF Master List midweek to give you a glance at those ETFs which have performed well enough to create their own fireworks.

I just found this story called “Utilities, REITs losing luster,” which features some of those sectors that have been the strong men over the past few years, but have lost their upside momentum.

I am talking about all REITs and Utilities; no matter whether you hold them as ETFS or no load funds. If you read my weekly StatSheet on a regular basis, you won’t need to wait for the newspaper headline to tell you which sectors are on the way down.

How?

One of the columns in my StatSheet table is titled %M/A, which is the percentage a fund/ETF is above or below his long term trend line (moving average). Following this number every week, will give you a quick glimpse as to whether a fund is close to a trend reversal. We saw that with our REIT holding in March, when the trend was broken to the downside (and we sold our VNQ holdings) as the graph shows:



At that time, you were not reading any headline news about weakness in that sector. Remember, the news media tends to pounce on very obvious facts, not necessarily in a timely manner.

Utilities seem to be heading in the same direction, although the trend line has not been pierced yet, as I have been writing in recent weekly updates. We’re still holding our positions subject to our sell stop rules.

Next time, you’re unsure about where a fund is at in the bigger scheme of things, take a look at %M/A, or a graph at Yahoo or any other financial web site. The old axiom that a picture is worth a thousand words, certainly applies to trend tracking.

Reader Bill e-mailed a feature story in MarketWatch called “Get set for lower long-term stock returns” featuring quotes from Paul McCulley, who is the managing director at PIMCO, the bond guru firm.

He said that “stock returns will be lower for the next 25 years than they were in the last quarter century and investors must adjust their expectations to lower returns.”

His conclusion is sobering for many in that “the stock market’s long-term erosion will force consumers to make one of three unpleasant financial choices: work longer, save more of their current income or reduce expectations for their retirement lifestyle.”

Aaah! I feel so much better about the future after reading that. Yes, this is what you will find in the media on a regular basis: Unadulterated garbage. I can’t stand people sitting in ivory towers and dispensing opinions as if they were omnipotent.

And that’s the beef I have with this kind of forecasting or predicting. It is nothing but a wild guess on Paul’s part, but it sure will rattle the nerves of many investors who hang on to any stupid and negative story that’s written in the press. And it is front page news every time.

Think about this for a moment. It’s impossible to be reasonably accurate in guessing what the Dow might do next week, next month or even by the end of this year. But over the next 25 years? Come on.

However, I think there is a way that we can test Paul’s forecasting abilities. Let’s call him up and have him predict the exact balance of his personal checking account for December 31, 2007. Or the balance of his retirement account by December 31, 2008. If he can do that accurately, then I might believe that he indeed possesses some super natural powers of looking into the future.

It’s ridiculous, of course, he can’t. And so is looking 25 years into the future.