Okay, I had to shorten the title due to space limitations. I am referring to Larry Swedroe’s book “The Only Guide To A Winning Investment strategy You’ll Ever Need.”

It contains some interesting (but rehashed) information I have written about before. Larry is a proponent of index investing and seems to think that buying and holding indexes is far superior to active investing.

I have to be honest with you; there is not much in this book I can agree with. Actually, it makes my hair stand up and I could write endless posts on my disagreements. However, I will only focus on a couple of items, which I found worthwhile sharing with you.

Page 34 features a table showing the devastating effects of the last bear market and Larry’s point is that even royalty funds like Janus suffered severely.

To me, the interesting thing about reading forecasts is that nobody seems to agree on the direction of the market. Despite the fact that everyone has the same information available, opinions vary and many times are opposite of each other. That’s a dead giveaway of the value of a forecast, which is zero.

Nevertheless, I read some of them strictly for entertainment.

While I actually may agree with some of the views expressed, they never ever form the basis of my investment decisions. MarketWatch had a recent blurb called “Still a lot of chances to buy upward mobility,” which featured an interview with Donald Hodges, co-manager of the Hodges fund.

His opinion was that “that the stock market will remain stronger than many observers seem to think, and that there are days with severe reactions, but that’s more typical of a strong market than of a real bad one. The bad markets we have been through are the ones that roll over and just get you every day.”

I can agree with that.

The article ends with an opinion from Eugene Sit, chairman of Sit Investment Associates, who says that “he expects stocks to suffer a short-term downturn — in the neighborhood of 5% — before a year-end rally allows the market to finish the year about 3% higher than it was at the halfway point.”

I can agree with that too.

Here you have two somewhat different opinions similar to what you might read daily in any of the media. Unfortunately, many investors use these as a basis for making their investment decisions, and that’s the problem. It’s just an opinion, which you can agree with or not, but that’s it.

This is the exact reason why I never state a view as to where I think the market is headed, although I get many requests from readers who seem to think I have some mysterious power to look into the future.

I track trends and deal with facts; not what might be happening or what I want to happen, but strictly what the numbers tell me “is happening.” If you can get away from overindulging and participating in the (for the most part useless) daily news barrage, you might find yourself looking at facts rather that predictions, which are a far better basis for making more appropriate investment decisions.

I just finished reading a book called “Freakonomics” by authors Levitt and Dubner. Levitt teaches economics at the University of Chicago, while Dubner writes for the New York Times and The New Yorker.

Most economists, at least from my experience, string together endless numbers to make a statistical case. However, Levitt dances to the beat of his own drummer. I enjoyed reading about seemingly unrelated topics and how they actually tie together using his research, which is based on numbers, of course. He thinks way outside of the box yet his logic is impeccable and is supported by an obvious sense of humor.

You can’t take yourself too seriously if you write about topics like this:

Which is more dangerous, a gun or a swimming pool?

How did the legalization of abortion affect the rate of violent crime?

Freakonomics really examines the hidden side of everything. The inner workings of a crack gang. The truth about real estate agents. The myths of campaign finance. The telltale marks of a cheating schoolteacher. The secrets of the Ku Klux Klan.

If you enjoy a book that looks at life’s day-to-day events in a different light, this is a fun read. My only suggestion to the authors would be to tackle another subject of interest to many, which would be examining the somewhat questionable dealings on Wall Street in the same way they did the topics featured in this book.

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.