Yesterday, one of my readers posed an interesting question:

“I own both IIC and EVM (Muni CEFs) in my taxable Scottade account. This week, I noticed a large price spike about mid week followed by a price drop today and yesterday. I believe it had to do with some news of dividend payout dates. Here is my question for you. Is it alright to sell these when a spike occurs and then buy them back in a day or two? I do want to continue to own these for the long haul but could have made a few bucks trading them this week!”

Turns out that the price spike happened because of market conditions and it raised the NAV by a little over 1%. If you could turn back the clock to that point in time, I still don’t think it’s a good idea to sell those positions for the following reasons:

1. The increase/spike is fairly small and considering the buy/sell spread and the trading fee, it’s simply not worth the effort.

2. Since this transaction would have happened in a taxable account, the capital gains would have caused a taxable event; not just for this small gain but all gains accumulated to this point.

Income investing requires a different mind set. If that’s your investment objective, you might want to read my article called “10 Rules For Successful Tax-Free Income Investing” at:

http://www.successful-investment.com/articles31.htm

Yesterday’s piece in MarketWatch titled “Quit hanging on to milquetoast funds” contained a lot of truth.

In an interview, Steve Goldberg of Tweddell Goldberg Investment Management said that “investors should look at their mutual funds as if they are buyers or sellers, rather than holding on to lukewarm performers hoping for improvement.”

He added that “most people hang on to a fund too long, hoping for a return to a break-even point or to a place where they can make an exit and say that they doubled their money, without regard to the length of time such growth involved.”

I my advisor practice, I have found that to be true as well. I still get calls from readers who are proudly reporting that they have now finally reached a break even point after hanging on to the same funds through the entire bear market of 2000-2003—and beyond.

Maybe it’s a good idea to heed Goldberg’s advice, who finished by saying that “if a fund is good enough to own, it’s good enough to buy more; and if it’s not, then why are you hanging on?”

I can only add that the reason most people hang on is that they don’t have a clearly defined exit strategy. If they had one, they would automatically get out of funds as performance (due to market conditions) deteriorates and triggers their sell stop points.

Are you still hanging on to a fund you bought some 7 years ago?

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

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

Sideways to upward bias pushed all major market indexes slightly higher.

Our Trend Tracking Index (TTI) for domestic funds moved higher as well and now sits +4.60% above its long-term trend line (red) as the chart below shows:

The international index rallied as well and has now moved to +9.37% 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.

A few days ago, I was discussing the bear market of 2000–2003 with a prospective client, when he pointed out that he actually held on to one fund profitably through the severe downturn.

Really! Even though we avoided most of the bear by being in cash on the sidelines, any fund which has the ability to hold up against the major trend is worth looking at.

Take a look at the chart of PRPFX:

This question is like a two-edged sword, and I am bound to step on somebody’s toes. I think the most important issue in answering that question is what type of investment approach you are using.

If you are one of those Buy-and-Hope followers and always in the market, then, by all means, you want a fund manager with a good track record. Because you hope that he has a way of bailing you out during times of market turmoil.

Dream on! When a bear market hits, such as we’ve seen from 2000 – 2003, all equity funds (and others) tend to go down with utter disrespect to the fund manager in charge.

If, however, you use a trend tracking approach, such as I advocate, then the fund manager is not that important. When you analyze funds based on their momentum figures, a fund manager’s strong performance will be reflected in the underlying price of the fund. It will move up in the (momentum) ranking food chain making it a candidate for a buy.

The bottom line is, whether a manager leaves a fund or not, has no effect on my decision making process. So, when I read articles in MarketWatch that report a change in fund management and ask the investors to be patient and give the new guy a chance, I have to chuckle and wonder who really wrote that piece.

As I said above, in bear markets all equity funds go down. However, that’s not entirely true. One of my readers pointed out a no load fund, which bucked the trend and put on a super performance. In tomorrow’s post, I’ll tell your more about it.

If you are following my trend tracking approach to investing in no load funds and ETfs, you know that I’m a strong advocate of using sell stops.

Obviously, you can’t place sell stops for mutual funds. You need to track them yourself and place the order after your point has been triggered.

What about ETFs?

Should you place your sell stops ahead of time?

In my advisor practice, I only work with day-end prices and ignore the intra-day fluctuations.

Why?

The reason for my sell stop is to get out of a position only if the long-term trend has reversed, which means that I don’t want to be subjected to the minute-by-minute volatility of the markets.

Here’s what reader Kurt experienced:

“I had the stop loss sell points at my broker; unfortunately I seem to be getting stopped out at the worst possible intraday prices. I think I’m just going to execute my sell points myself…No point in showing my hand.”

If you work with day-end pricing only, there is no reason to place your order ahead of time. For one, if the markets move up, the sell stop point changes and you have to change your order as well.

Two, let’s look at what happens to your pre-set sell stop. It goes to the trading floor and becomes part of a trader’s stack of orders, which he executes as per instructions.

Now remember, this trader also scalps the market for his own account. Hmm, do you think him knowing where some of the buy or sell stops will be triggered, gives him an edge? I’m not saying that anything unethical would ever happen on Wall Street’s trading floors, but it makes you think, doesn’t it?