Just after the bear market of 2000, I published an article called “Do Lifestyle funds Provide Greater Security?” I talked about the fact that they were a new product that could be sold to investors by giving the incorrect perception that the value will not drop, and they would provide some means of safety.

That fact got shattered in a hurry as losses piled up big time as the bear struck and ravaged portfolios.

Lifestyle funds have since been renamed and are known as Target funds. The underlying problems have not changed as these funds again got clobbered during the 2008 market meltdown.

Kiplinger writes as follows in “The Best Target Funds:”

The bear market punished target-date retirement funds. From October 9, 2007, through March 9, 2009, funds geared for investors expecting to retire in 2010 tumbled 35% on average, while the average 2030 target-date fund plunged 51%. Meanwhile, Standard & Poor’s 500-stock index lost 55%.

Bear-market performance of 2030 funds clustered tightly. Leading the losers again was the Oppenheimer fund, which fell 57%. So did AllianceBernstein’s. But that’s only six percentage points worse than the average 2030 fund’s loss. Investors in these funds are presumably more than 20 years from retirement, giving them plenty of time to recover. That is especially true for those who have continued to invest regularly.

[Emphasis added]

This is the idiocy of it. Because you have presumably 20 years to retirement is now the justification for you to be able to afford losses because you have plenty of time to recover.

Nothing has been learned from the bear market of 2000 or from 2008. If this economy follows the direction of Japan, and we end up with a lost decade or two, these target funds will have a hard time making up those losses.

I am whistling the same tune over and over again: The only way to get ahead with your portfolio long-term is by not participating in severe market drops and ending up spending years making up losses.

Whatever investment approach you follow, you need have an exit strategy in place to guard against the unknown. Working without one can and will be hazardous to your financial health as history has shown.

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

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

Lack of confidence in the recovery pulled the markets down for the 4th week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +1.75% keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken above its long-term trend line by +6.42%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.



[Click on charts to enlarge]

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

The markets continued to struggle yesterday but managed a turnaround in the last hour from another sharp sell off. The effect on our Trend Tracking Indexes was negligible.

Every so often, I like to look at the big picture as to where we are in relation to other historical bear markets. The best graph on that subject is compiled by Doug Short, and I have referred to it in the past several times.

Take a look:



[Click chart to enlarge]

A picture is worth a thousand words and this one is no exception. It is interesting to me that the current market drop from 2007 (blue line) most closely resembles or tracks the crash of 1929 (gray line).

Sure, nothing is certain, and there is no way to accurately forecast if the current trend will end up like the 1929 scenario. My point is that a directional change can happen either way at anytime; it simply pays for you to be prepared so you don’t end up wandering around in astonishment should the bottom drop out again.

Any investor not preparing himself via some kind of exit strategy may be doomed to pay a high price for ignorance—again.

The markets could not find any footing yesterday and south we went. Oil prices slipped due to the fact that the much touted recovery may not arrive as expected, which would reduce demand.

As is usually the case with sharp market rebounds, the magnitude of this one overshot to the upside and was way overdue for a correction. With talk emerging, that another stimulus package is needed by the end of the year, it simply confirms that all is not well.

If another package is enacted, it will have just about the same effect as the current one, which was zero. It does nothing but elevate hope that a recovery is near, which helps the markets rally, and then we’re back to square one except more debt has been created. It’s a vicious cycle indeed.

This drop affected our Trend Tracking Indexes (TTIs), which now are positioned as follows:

Domestic TTI: +1.28%
International TTI: +6.82%
Hedge TTI: -0.59%

We will hold all positions subject to our trailing sell stop points.

I’ve never thought much of the various stimulus packages in the pas, nor have I changed my mind at this time.

From my vantage point, ridiculous amounts of money have been poured down the drain with nothing to show for.

For some more on this topic, Mish at Global Economic Trends, had these thoughts in a post titled “No amount of stimulus will work.” Here are some noteworthy highlights:

No Amount of Stimulus Will Work

There is a price to be paid for reckless expansion of credit and we are paying the price now. All artificial stimulus does is prolong the agony. The greater the stimulus, the greater the period of future agony, just as happened in Japan. Ironically Keynesian and Monetarist clowns shouted for more stimulus all the way, and they are doing so again now.

The reason I bring this up is that I believe that the current market rebound was a result of the stimulus efforts supported by hope that positive results will be the outcome. So far, I have not seen anything, when looking at the economic landscape that confirms that the efforts have been fruitful.

Eventually, lack of results will filter down to Wall Street and may cause the current rally come to and end. I’m not being negative here, just realistic, so investors remain cautious and open to the possibility that this market can suddenly shift into reverse.

We’ve seen sudden severe directional changes several times over the past year, so be prepared to act if it happens again.

Ever since last year’s market crash, stories abound as to how investors can avoid getting slaughtered again. The WSJ (sorry, no link available) featured brokers promoting managed-futures funds, which returned some 14.1% last year, while other strategies took a dive.

Kiplinger published an article titled “Balanced Fund Take The Edge Off Stocks,” which makes the case for the use of balanced funds:

There’s a Wall Street adage that says the only thing that goes up in a bear market is correlation. That certainly held up last autumn. Everything that didn’t have “Treasury” in its name took a tumble in late 2008, including most bond classes. Still, funds that invest in a combination of stocks and bonds managed to do their job of mitigating losses.

I obviously disagree with that statement; but you certainly will never find anyone tied into main stream media admitting that being totally out of the market would have been a far more preferable option. Remember, investors have to be the proverbial hamster on a wheel by always being invested in the market, no matter how inappropriate that might be, so that someone can collect fees/commissions.

The average fund in Morningstar’s “moderate allocation” category, which includes funds that invest 50% to 70% of their assets in stocks, lost 28.0% in 2008. That’s no treat for investors, but at least it was far better than the 37.0% loss for Standard & Poor’s 500-stock index.

A balanced fund might be the ticket if you want to move into stocks but are worried that the market could surrender some of its recent gains. Another benefit of going balanced? Because most balanced funds stay close to a set asset allocation-such as 60% in stocks and 40% in bonds-managers must pare stock holdings when shares enjoy big runs and are forced to buy more stocks when the market falls. In other words, buying low and selling high is built into the DNA of balanced funds.

Sure, having lost “only” 28% vs. 37% is a better performance, but still not as desirable as having been on the sidelines.

To my way of thinking, balanced funds are appropriate for conservative investors and are suitable with trend tracking as well. You will not have the upside potential, but you may also avoid a whip-saw signal when the markets correct temporarily. Nevertheless, having the mindset that these type of funds can be held, no matter what market conditions are, has proven not to be the answer when the bear strikes.

It doesn’t matter what kind of equity funds/ETFs you invest in, only a disciplined exit strategy will help you avoid portfolio destruction.