If you thought that Magellan was a behemoth of a mutual fund, think again. It just got dwarfed by the mother of all funds, American Funds Growth Fund of America, which weighs in at a hefty $165 billion in assets.

Normally, I wouldn’t even pay attention to this fund, since it has a front load of 5.75%, but an article at Motley Fool’s website made me wonder if this bloated condition might have an adverse effect on performance.

The article cites a number of amazing stats showing that this fund actually outperformed the S&P; 500 over a longer term basis. I did a quick 5-year comparison in the chart below and confirmed the findings.



Of course, the fund hasn’t always been this large, so looking at its past may not be as accurate for the present. Only time will tell.

What tickles me though is that there is currently a big debate going on as to the benefits of indexing vs. the use of actively managed mutual funds. This article sure is a feather in the cap for the folks who promote the actively managed funds, although the index people are trying very hard to come out on top.

I can tell you already that neither one is right, but I will be weighing in with more detailed opinions in future posts after finishing Larry Swedroe’s book on the subject.

It has happened again. Every so often a new book appears on the market that depicts impending gloom and doom. The latest one is Peter Schiff’s ‘masterpiece’ called “Crash Proof: How To Profit From The Coming Economic Collapse.”

Schiff, who owns an investment company, has been predicting bad economic things for a while and has been frequently quoted in Orange County (California) newspapers. He took his prediction of a severe real estate collapse to heart a few years ago, sold his house and relocated somewhere in the mid-west, where he is now ‘renting’ and ‘raving.’

In an interview with MarketWatch he says the severe real estate downturn is underway and the “mother of all recessions” is to follow.

While I don’t pay much attention to any kind of prediction, it brings up the question as to what you can do to weather an economic downturn, and a subsequent bear market, should both ever come to pass.

First, a downturn does not start with a bang overnight. It starts with a slow deterioration of stock prices followed by the occasional rally attempt. You can be fairly sure that, once prices have been pushed down and the media (or your broker) tells you this is ‘a great buying opportunity,’ the party will be over.

Second, if you follow my trend tracking methodology, and monitor your trailing stop loss points, you are automatically limiting your downside risk. There is no need for you to guess what the markets might do. If you get stopped out, great; it’s time to take profits and look for other opportunities. Our momentum tables will tell us if there are areas that buck the recession that might offer investment possibilities.

Bottom line is: Stay away from any kind of predictions. Wall Street is littered with dead bodies who at one time in the past decided that they could look into the future.

Motley Fool had an interesting observation on ETFs, one that I have touched on before. New ETFs are being brought to the market as fast as regulatory approvals can be obtained.

It’s been my philosophy to let each ETF accumulate about 1 year’s worth of price data before I would even consider it. The reason is that I personally like to be able to identify a trend so I can determine whether this ETF is going up, down or sideways.

However, just because you have 1 year of data doesn’t mean that it’s time to jump in. Many new ETFs are covering a tiny market segment, which is of not necessarily of use to most mainstream investors.

The article “ETFs Derailed” brings up another important point about the (ridiculous) segmentation of ETFs. It cites examples that in obscure areas of the market, like oil, ETFs can bring about a wide divergence from their stated benchmarks. In other words, you can’t be really sure what you’re buying and how closely you are following a stated index.

There is no problem with main stream ETFS tracking their indexes, such as SPY, QQQQ and DIA, among many others. But with small esoteric ETFs, this apparently can’t be guaranteed.

As always, buyers beware!

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

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

The Dow’s run at new highs continued supported by good earnings

Our Trend Tracking Index (TTI) for domestic funds made new highs as well and now sits +5.70% above its long-term trend line (red) as the chart below shows:



The international index rallied into record territory and has now moved to +10.32% 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.

I couldn’t quite figure out why General Motors said a couple of days ago that SubPrime problems might be affecting them too. Huh?

They make a lot of car loans (oh yes and cars too), but real estate loans gone sour having an impact on their business?

Hmm, I realize that GM is constantly in the news justifying why they are no longer the big dog, why they are having this or that problem, why their cars are inferior to others and most recently, why they’re issuing a weak outlook.
It wasn’t until I read ‘Tuesday Tidbits’ at Random Roger’s blog that it started to make sense. He brings up an important point by saying that if people are in financial trouble, they will let other debt lapse first before their mortgage.

That most certainly would apply to SubPrime borrowers who, by definition, are financially disadvantaged. If the heat is on, they could file bankruptcy and get most of their consumer debt dismissed, except their mortgage loan. That’s why consumer advocates are trying to get the law changed—to include debt of mortgages as I mentioned in a previous post.

Once they let the mortgage go, it’s pretty much a sure thing that other debt already has reached delinquent status. Could GM be right this time?

I read a great interview, better referred to as a muscle flexing contest, between some of the titans of the mutual fund industry. In one corner, we have John Bogle, founder of the Vanguard Group and pioneer of index fund investing.

In the other corner sits Jeremy Siegel, professor and author, who has reinvented indexing with his company, Wisdom Tree, which indexes funds according to earnings or dividends rather than market capitalization.

“The great debate over index funds” illustrates heated arguments from both sides supporting their view. Even though it’s a written interview, you can detect the cold undertones and total disagreement about their respective investment approaches.

I am a pragmatic person and like to apply some numbers to these arguments as to which type of indexing, if any, works better. Let’s look at a comparison of these 2 views during a time when the dangers were greatest to your portfolio—the last bear market.

For this scenario, I wanted to find out how a plain index, such as the S&P; 500, had performed compared to a high dividend paying instrument, such as a Closed End Equity Income fund (ZTR). Here’s what I found:

ZTR in 2001: +18.74%
ZTR in 2002: -13.92%
Total over 2 years: +4.82%

S&P; 500 in 2001: -11.89%
S&P; 500 in 2002: -22.10%
Total over 2 years: -33.99%

Judge for yourself which one came out ahead.

While I am not a proponent of indexing, because of the severe bear market problems, I am in favor of using inexpensive index funds/ETFs. To me, the better way would be to combine index funds with trend tracking to avoid the above problems.

However, judging by the firmness of the debate in the article, I doubt that either of the gentlemen would be open to any other suggestions.