When you have been dealing with No Load Mutual funds as long as I have, there is bound to be a run-in with a fund manager regarding investment philosophy.

This happened a couple of times over the past 2 years with the end result that my advisory firm was banned from placing trades with that particular fund family — forever, I suppose. Not that I was all broken up over it, but the reasoning left a bad taste in my mouth.

Here’s about how the phone conversation with the fund company (FC) went:

FC: “We noticed that you bought one of our mutual funds and sold it again within 60 days.”

Me: “That’s correct.”

FC: “We don’t allow that. We want advisors to invest with us for the long term. Don’t you do asset allocation?”

Me: “Yes I do. I generally invest for the long term, but the markets pulled back sharply and, to protect my clients’ portfolios from further damage, I moved to cash.”

FC: “We don’t allow that, you’re not supposed to time the market.”

Me: “Let me ask you, what is this fund’s Annual Holdings Turnover?”

FC: “Let’s see, this fund has an annual turnover of 140%.”

Me: “So, that means you pick your stocks and, if they don’t perform, or economic circumstances change, you sell them and buy others. By the end of the year, you have a turnover of some 140%. Is that correct?”

FC: “Yes, that’s right.”

Me: “Then, why don’t you pick the appropriate stocks in the first place? I am sure, that type of frequent in-and-out trading increases costs for your shareholders?”

FC: “Ah…well…you know, that’s not how it works. Things may change, or a stock heads south, and we need to adjust to increase our performance.”

Me: “That makes sense. Then why am I not allowed to do the same thing? If the markets change, I should have the right to liquidate positions, just like you do, to protect my clients’ assets or increase performance. I noticed that, during the last bear market, this fund went down some 40%. If we head in this direction again, shouldn’t my clients’ interests be priority?”

FC: “Hmm, no…yes, but our policy doesn’t allow that. We need to ban you from further trading with our firm.”

Me: “That’s your loss and not mine. Go ahead — ban away.”

That’s the prevailing attitude among most fund families. Their interests rule and yours don’t really matter.

If this type of thinking continues, more and more investors will eventually realize this and move their accounts. Guess where the assets will go?

Into ETFs, of course!

The media was at it again analyzing the great fund performance record of fund manager’s Bill Miller’s Legg Mason Value Trust. They did it in all fairness (this time) by giving credit to his great 15-year performance, during which he prevailed over the S+P 500 every year.

In fact, his fund showed an average annual rate of 15.8% vs. the S+Ps 11.9%.

This year, he wasn’t able to match his past record and his fund gained only +6.7%. However, keep in mind that this doesn’t tell the whole story. Take a look at the chart below. It shows a 5-year price history of Miller’s Legg Mason Value fund:

As you can see, during the bear market of 2000 to 2003 (red arrow), this fund dropped just as much as any other, from a high of some $60 to a low of around $40, before rebounding in 2003.

So, before you run out and place your buy order, keep in mind that, no matter which equity fund you chose, they will all go down in a bear market. An appropriate exit strategy, with trailing stop loss points, is the best insurance against jeopardizing your portfolio.

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?