2006 was a year of extremes. In the ETF world, 2 funds ruled on the extreme end, one by superior performance, the other by a devastating loss.

The clear winner was the China fund (FXI) with a yearly gain of about +81%.

While the 1-year chart shows this fund as being in a solid uptrend, it doesn’t tell the entire story. During the market melt-down of May/June 06, this fund dropped -21% off its high. So, if you worked with a recommended sell stop loss of 10%, you would have been out of your positions at that time. Of course, the subsequent market rebound rally would have offered a new entry point.

The loser of the year was the Turkish Investment fund (TKF) with an amazing loss of -33%. During the correction of May/June, this fund had dropped a devastating -51% off its high.

As the 1-year chart above shows, this fund never regained momentum and stayed below its long-term trend line for the remainder of the year.

The point is that no matter which fund you would have picked, a disciplined Buy/Sell strategy would have either kept you in the market on the right track or limited any potential losses from a wrong choice of funds.

Happy New Year!

I still have some unfinished business from 2006.

My preference is to pay attention to people who have actually done or experienced what they are writing about. It doesn’t matter if it’s a blog, an article, a book, or investments for that matter. To me, it increases credibility.

This really hit home a few days ago when I read on CBS Marketwatch how a reporter described his investment portfolio consisting of mutual funds and ETFs and the changes he had made throughout 2006 to be better positioned for 2007.

It was an interesting read, except when, at the very end, he disclosed that he had absolutely no invested positions in the aforementioned portfolio. Huh?

It simply was an exercise in theory. It makes a world of difference to run a ‘paper traded’ portfolio as opposed to the real thing. Sitting in front of a computer and entering your trades with your “real” money on the line can simply not be substituted. Anyone who has ever made the switch from paper trading to actual implementation of an investment strategy can certainly attest to that.

Many paid subscription newsletters are guilty of the same. Just dispensing theoretical information about investments, without actually being in the trenches every day and gathering real life experiences, makes me question that advice.

To my way of thinking, the above reporter’s credibility went right down the tube after he disclosed that he had nothing at stake. What’s your view?

Wall Street has been all giddy last week over the nice 2nd half-of-the-year rebound rally, after the heart stopping pullback during May/June 06.

With the S + P 500 having managed to gain almost 14%, the question is being asked how a Trend Tracking approach to investing in the market has fared. Well, in my practice, on average, we gained some 2% less than the S+P.

The main reason is that we paid what I call the “Safety Premium.” It simply is a reduction in the overall return for this year due to the fact that we controlled the risk by being on the sidelines when the markets collapsed during mid year. At that time, a return to bear market territory was a distinct possibility, although that fact seems to have been long forgotten.

When the markets returned to rally mode, we inched back into it taking advantage of the upward momentum.

It is a common occurrence in Trend Tracking that there are periods where we will not outperform the S + P 500 – and it is not necessary to do so. Long term we will have the edge, as many investors celebrated this year as finally having recovered their last bear market losses while we had moved ahead by leaps and bounds.

You can’t have it both, the highest returns along with the greatest amount of safety. There will always be a trade off and you have to make that decision as to which is more important.

Having avoided most of the last bear market, I gladly pay the “Safety Premium” to have peace of mind along with a good night’s sleep.

This is the time of the year when the media is having a field day again. Over the next couple of months, you will find headlines such as the following:

• 10 top stock picks for 2007
• The perfect portfolio for 2007
• My best stock for the year ahead
• 2006 losers ready to rebound
• 10 stocks for 2007 and beyond

It always amazes me where the reporter finds the ability to predict the future as to which investment may be ‘perfect’ for the next 12 months. Perfect for whom?

What are you supposed to do? Sell every investment that did well in 2006 and buy these new favorites? That’s ridiculous.

Keep in mind that these are nothing more than wild predictions and about as accurate as you can forecast the exact amount of money you will have in your checking account by 12/31/2007.

My preference is to hold my (and my clients’) no load fund and ETF positions, with no emotions attached, until economic circumstances change and my trailing stop loss points get triggered. That eliminates the silly guesswork and allows me to have a plan in place that can be easily monitored and adjusted.

Of course, this presumes that you work with an exit point strategy. You do use sell stops on your investments, don’t you?

With the explosion of Exchange Traded Funds (ETFs), one of the more frequent questions I get is whether ETFs are better than mutual funds.

The issue has been somewhat distorted by several large investment management firms and newsletters proclaiming that “we will never buy another mutual fund.”

I think that this is a little extreme, because there is a place for both in an investor’s portfolio. Sure, ETFs are a great tool, especially in view of the fact that many fund companies have given new meaning to the word “arrogance.” Short-term redemption fees and ridiculous trading restriction have rightfully led many in the direction of ETFs as the investment vehicle of choice.

However, while I use ETFs in my advisor practice as well, I usually limit myself to their use in those investment orientations that are more short-term by nature, such as sectors and countries.

Using my trend tracking methodology, I have found that mutual funds (no load) tend to perform better in the early part of a new up trend, such as we’ve seen after the market meltdown during May/June 2006. ETFs seem to lag a little, which is understandable. After all, they are broad indexes and as such they need their underlying securities to establish a direction first before they follow the trend.

New ETFs are being brought to the market almost daily. Should you buy them right away? That depends on if you are gambling or investing. I personally like to see at least 9 months of price data, so I can monitor where trend is headed before making a commitment.

OK, so I am somewhat biased because I run a fee-only advisory practice.

However, over the past 5 years, I have received hundreds of phone calls and e-mails from some of my 17,000 newsletter readers complaining about being misled by unscrupulous stock brokers, who were more interested in their financial well being than in their clients’.

Calling up a client and peddling a fund that will provide the salesperson with a great commission, but will do nothing for the investor, is simply unethical to say the least. It does remind me of the great commercial a few years ago with the now classic line “let’s put some lipstick on that pig.”

There are certainly a number of conscientious brokers in existence who have their clients’ best interest at heart despite being commission based; unfortunately, they are a minority.

To me, getting a client into an investment is only the first step. The second is to guide him along the way and make sure that his position is liquidated should market circumstances require that this is in his best interest.

An advisor can best represent this unbiased evaluation if he is fee based and not hungry trying to chase the next large commission checks.