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.

E-mail exchanges and conversations with thousands of my readers over the past few years have exposed me to an unusual and at times odd behavior when it comes to money and investments.

One thing I found was that some investors on one hand are trying to save pennies while on the other wasting dollars by the thousands without even being aware of it, or at least not thinking about it. To me, it’s an oddity when you have to convince someone that paying an upfront load is a total waste of money in today’s environment of low cost ETFs and no load, no transaction fee mutual funds.

Yet, at the same time, that same investor has just spent several hours of his time online trying to save $50 on his next vacation trip or his new PC.

What gives?

For the most part, I think it is just lack of understanding of how brokers make their money. Or annuity salesmen, for that matter. It’s an abusive world out there, and if you don’t educate yourself, you’ll end up holding the short end of the stick.

Most every investor is interested in the same thing when it comes to investment advice: To get an unbiased, honest opinion and receive some guidance without financial motivation based on the product involved.

Sounds simple and yet so difficult. I am not trying to toot my own horn here, but the key is the relationship between you and your advisor. If you engage the services of a fee-only advisor, you can be assured of three things:

1. He is only paid the fee rate you agreed upon

2. He has taken an oath to act in the client’s best interest

3. He does not earn money off any particular product, is not tied to a particular investment firm and is thereby free to offer unbiased advice.

Today, that’s as close as you can get to someone whose financial priority is you and not their own pocket. Compare that to a commissioned salesman who heavily promotes a company sponsored ‘loaded’ product and you know (or you should know) that if you buy, he stands to make thousands of dollars in upfront fees.

How is that for conflict of interest?

Recently, I read a story in TheStreet.com called “Hot Yields Drive Rebirth of Closed-End Funds.”

It did a good job describing the reasons for the renewed interest in CEFs. As baby boomers are aging and moving into retirement, the goal seems to be to generate as much income as possible. While 5% bond yields are common and boring to some, 8% to 9% yields are definitely better.

In February 07, the largest IPO in history for a closed end fund was launched raising some $5.5 billion for the Eaton Vance Global Tax Managed Equity Income Fund (EXG), which yields over 9%. That high yield is being generated by investments in domestic and foreign stocks that pay big dividends. Additionally, the managers use strategies such as issuing covered calls, index call options and preferred securities.

Before you jump right in and put your entire retirement savings on the line for this juicy yield, let’s look at a chart of EXG:



Obviously, this fund has only been around for a few months, but the trend has been down so far. To me, getting a great 9% yield is one thing, but losing value at the same time with the fund deteriorating is another.

When hunting for income generating instruments, I like to not just look at yield, but also at a fund’s ability to hold its value. Otherwise, you’re just trading dollars.

While this is not an exact science, it pays in this scenario to have longer term data available before committing your dollars. That way you can analyze how an income fund has performed during various market conditions. You will never find a fund that will fulfill your requirements 100%, but at least you should make an effort to weed out those that may be totally unsuitable.

Disclosure: I have no holdings in this fund.