MarketWatch had some interesting thoughts in “The high price of poor investment advice.” Let’s listen in:

Investment advisers, some of whom are inexperienced yet sincere representatives of the largest financial services firms, repeat stories they have memorized about where the best investments may be and how to find them.

1. “China and Asia are the best long-term investments and will drive the future of investing.”

While it is hard to read the tea leaves in volatile markets, it does appear that China is recovering and building for the next business growth cycle. Meanwhile, raw-materials suppliers, especially Brazil, are helping China achieve its potential.

Maybe they will recover and lead; but that does not make them a good investment at this time while the world is stuck in the middle of a bear market. Company layoffs and sharply declining exports are just beginning and any engagement in bottom fishing hoping for a quick recovery can have negative consequences for your portfolio.

2. “Economic growth in Asia is independent of the U.S. market.”

Asia has 10 times the population of the U.S. and three times the economic growth rate of the U.S. While Asia may be a great long-term investment now at “fire-sale” prices, it could be years before the region heats up again.

The myth of Asia and other parts of the world being decoupled from the U.S. came down crashing hard and fast. I agree that any recovery will take years because most of the Asian economies were built on export and selling product to the ever hungry American consumer. This consumer has gone into hibernation for years to come.

3. “I get my advice from (fill in your favorite major bank or stockbroker) and they will take care of me.”

The average no-load stock fund manager has just over four years of on-the-job experience (that doesn’t even stretch back to the 2000-2002 bear market). Even the five-star rated funds averaged a loss of 29.1% in 2008; at least those managers average six-and-a-half years of experience.

A stockbroker taking care of you? Oh yes, that turned out to be the biggest lie of 2008. As I have written many times before, brokers and others engaged in selling products based on commission are in the business of generating income for the firm and are not concerned too much about your financial well being.

They only know how to get you into an investment and continue to prove that buy-and-hold is the ultimate losing proposition. Here’s the best advice I could ever give you: Never ever do business with an advisor/broker that does not have an exit strategy. That will eliminate over 95% of them.

4. “International funds add to your diversification.”

In the past five years some countries’ stock market indexes grew at five times the rate of the U.S. stock market (until U.S. stocks fell off the cliff), and while the U.S. dollar was declining, international investing was safer.

Sure, in a bull market, it’s a great idea to diversify into some international funds. However, in a bear market, they go down faster than then domestic market. This was proven via our international Trend Tracking Index (TTI), which signaled a sell on 11/13/07; way before the domestic TTI did on 6/23/08.

5. “What is your risk tolerance? Let’s talk about an asset allocation especially for you.”

In recent years, avoiding risk has been more successful than taking it. Your advisers had no idea because they wanted to sell you something (gather your assets under management) instead of growing your assets. As a result, over the past decade you often invested in growth funds that didn’t grow and value funds that added no value.

If you follow mindless asset allocation, you bet it’s important to work with an investor’s risk tolerance. If you follow trends, and you use sell stops at all times, that issue becomes less important.

6. “I only invest in five-star Morningstar stock funds.”

The 274 five-star Morningstar rated, no-load stock funds lost 29.1% on average last year. Why? They wouldn’t go to cash to protect you from investment losses and many took excessive risk to earn star ratings.

Using Morningstar rankings along with buy-and-hold is the biggest losing strategy an investor can engage in when we are crossing into bear territory. The sad story is that neither Morningstar nor the investing public learned that fact from the 2001 bear market, which is why they participated in a repeat losing performance in 2008.

7. “The stock market will come back.”

Frankly, if your stock funds’ value doesn’t disappear, it doesn’t have to come back. Since the end of 1999, most fund companies have lost you so much money that you may never see your investments intact in your lifetime.

Sure, the market will come back. The question is will you be around to experience it? Losing 40% to 50% of a portfolio’s value, as happened to many in 2008, will alter your future forever. Hopefully, you won’t be one of those who can finally retire about 6 years after you have died.

8. “Long-term goals can only be reached by investing in the stock market. The money market won’t get you there.”

To build up wealth over the long-term you need to have the discipline of avoiding losses in down markets and investing in the hottest sectors in rising markets.

True. Being in money market will not make you rich. However, it’s an appropriate investment vehicle to be in when the markets are in turmoil. It sure makes more sense to be safely on the sidelines than watching your portfolio slide into abyss. The famous gambling line “Know when to hold ‘em—know when to fold ‘em” makes a lot of sense in this environment.

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

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

Finally, after 4 losing weeks, the major indexes rallied on hopes of a new stimulus package being finalized.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -8.82% thereby confirming the current bear market trend.



The international index now remains -15.89% below its own trend line, keeping us on the sidelines.

Reader Ray submitted an article by Barrons’ titled “Capital Idea: Preserve It:”

THIS YEAR MARKS SEVENTIETH ANNIVERSARY of the apotheosis of the Golden Age of Hollywood with the release of both Gone With the Wind and The Wizard of Oz in 1939. But the period isn’t recalled as a golden era for the stock market.

There are two kinds of losses, Yamada explains: A loss of capital and a loss of opportunity; but there will always be another opportunity if you protect capital.

This has been my view all along. Bottom pickers are at it again in full force. The problem is that most will assume that the final bottom is in and won’t see the need to protect their investments via sell stops, in case they’re wrong and the markets head lower. Even those buy-and-holders, who have not learned a lesson and are still hanging on, will be in for a rude awakening, should the bottom drop out.

It’s impossible to predict whether lower lows are ahead or not. However, the trends are clearly entrenched in bear market territory, so that possibility exists and you should plan accordingly. It’s wise to heed Louise Yamada’s words “There are two kinds of losses: A loss of capital and a loss of opportunity; but there will always be another opportunity if you protect capital.”

I did not think I would ever see the day that an article would actually admit that the traditional buy-and-hold approach has lost its relevance.

Thanks to reader Nitin for pointing to “The Market’s Latest Victim: Buy-And-Hold Strategy.”

As traditional market signposts lose their relevance, so does the traditional “buy-and-hold” strategy that investors have followed for decades.

Dealing with the market’s intense moodiness is all part of the job these days.
…
With all of the obstacles facing the market, regaining investor confidence will be critical before buy-and-hold positions become popular again.

[My Emphasis]

It’s clear that most investors and professionals have no idea what they’re doing in this environment. If you’ve lived all of your life with buy-and-hold, there is no way that you can make a sudden sensible adjustment to successfully deal with a bear market.

Read that last paragraph again. If investor confidence is required to go back to buy-and-hold, I can only hope that this confidence will never be regained since it will only cause complacency, which will literally guarantee a repeat disaster once another bear market strikes again; no matter how far that will be in the future.

About a month ago, the beginning of January, a reader contacted me to comment on my Trend Tracking Indexes (TTIs).

He liked the idea of following trends, but believed that the potential buy signal back into bullish territory was not happening fast enough. So he designed his own accelerated system, which indicated a move back into equities at that time. His reasoning was that, since he had lost a lot of money in the past he had a lot of making up to do, so he couldn’t waste anymore time waiting for my “slow” TTI to generate a new buy signal.

This is simply a bad idea for several reasons:

1. Looking back at January, we now know that the S&P; 500 lost some 8.5% and, most likely, this reader lost a similar amount with his new strategy.

2. Being aggressive by moving into the market based on “having to make up losses” is simply being ignorant and/or desperate. That idea alone will produce more losses more often than not.

3. The reader is trying to do what is commonly referred to as “curve fitting,” which means tightly adjusting an investment method to current circumstances. When the circumstances change, he needs to make adjustments again and again.

An investment method should be tailored like a comfortable suit. Not too tight and not too loose so that a couple of pounds either way won’t require you to constantly have to make alterations.

MarketWatch featured some interesting “Questions to ponder while awaiting bailout:”

We have a new administration in Washington and a new power structure on Wall Street.

How are the final-year MBA students at Wharton and Harvard feeling about job prospects this spring?

Interesting questions indeed. The greatest focus will be on the creation of a ‘bad bank,’ which seems to instill the false hope that the end of the recession is near as soon as this toxic asset dump has been established.

In my view, the initial effect on the markets will be one of relief at first followed by a rally before the reality sets in that simply shifting bad assets onto the back of the already burdened taxpayer will not end this bear market prematurely.