The WSJ had an interesting article called “Bigger Bets and Risks with these ETFs.” It addresses the use of leveraged ETFs to enhance performance or to double your losses.

The story uses the Rydex Dynamic S&P; 500 fund as an example, which tries to duplicate double the daily performance of the S&P; 500 stock index. Interestingly, during the recent market pullback the Rydex S&P; 500 lost 6.3% while the traditional Vanguard 500 Index fund lost only 3.1%.

However, over a longer period of time, there seems to be quite some disconnect from the daily objective. The study says that the Rydex S&P; 500 fund gained an average of 11.2% a year over 5 years, while the Vanguard 500 Index fund gained 9.6% annualized.

Huh?

What that means to me is that you are getting in the neighborhood of twice (or more) the downside risk, but nowhere near twice the upside potential reward.

That’s not a good combination and, as I mentioned before, I personally don’t use leveraged instruments in my advisor practice. I suggest you research carefully what you are getting into, should you consider leveraging your portfolio.

The Motley Fool featured a piece called “Smash the Market,” which focused on 4 points a savvy investor should consider before buying any mutual fund.

While some are questionable to my way of thinking, they are widely held beliefs and it may help you if we take a look at them one by one:

1. Fees

The myth is to focus on searching for funds with below average expense ratios and avoid load funds like the plague. ‘Amen’ to the latter and ‘not necessarily’ to the former.

Of course, if your mode of operating your portfolio is to Buy-and-Hope through thick and thin, then the underlying cost of a fund can make an important difference.

However, if you use Trend Tracking as your investment discipline, then costs are secondary to performance because you will be exposed to the market for a shorter time frame. For example, during the rebound of 2003, after the devastating bear market, one of our holdings was NAMCX. It absolutely took of gaining some 60% over a 2-3 months period. Do you think I was concerned whether this fund actually had a peer with a lower expense ratio? Heck no; great performance for a given period can always command higher fees.

2. Tax Efficiency.

OK, while important, the article states to avoid a fund with high turnover with use of a non-tax-sheltered account. Then it goes on to say “to look for a manger with a buy-and-hold strategy.” That’s were it gets very iffy. I have actually met investors who, for tax reasons only, held on to an investment, which then proceeded to tank and lost more money then the taxes saved. That is simply insane yet many people operate that way.

3. Management

I agree somewhat with using a fund manager with some experience, although it won’t make any difference if a bear market strikes. If the objective of a fund is, say, ‘domestic large blend,’ then that’s what he has to invest in. If the trend heads south, guess what? The experienced manager will lose your money just as well as the inexperienced one.

4. Strategy

This one gets to me as article says that “the fund’s manager should have a proven strategy that’s been battle tested over numerous market cycles.”

Huh?

If he runs a fund that’s supposed to be long in the market, how can he have a proven strategy? How will he deal with a bear market? While he can make some adjustments to his portfolio, he can never ever be 100% in cash? Why? So the investing public can always buy and redeem shares.

Be aware that as an investor, you will have to come up with a strategy that keeps your portfolio intact when the markets slide. Don’t rely on your mutual fund—you will live to regret it.

Investors, for the most part, are a confused bunch. And, I hate to say it, but that includes some of my 17,000 weekly newsletter subscribers. Not a day goes by that I don’t get the same question asked by different readers.

Maybe that’s my fault for not being as clear about some of the ins-and-outs of trend tracking as I think I am. This is what the most frequently asked question sounds like:

“I have owned this ABC fund/ETF for some time and recently I’ve been reading that it is no longer recommended and a broker friend at ‘I-want-to-sell-you-a-commissioned-fund, Inc.’ also says I should get rid of it. Please give me your opinion.”

Usually, when I look at the chart, it’s a pretty decent fund that is within 2-3% of its high and definitely following the current uptrend. Additionally, it has held up during market pullbacks similar to other funds in that category.

My answer is the same every time. First, stop exposing yourself to information overload and second, stop listening to people with an agenda. Focus on what I write on a weekly basis: Figure out the highest price of the fund/ETF since you bought it and set a trailing sell stop point.

That will eliminate any kind of guessing game and will keep you invested in an up trending fund until the market reverses and your sell stop gets triggered. This effort will take you 2 minutes a day of checking prices, and it keeps you away from the media and their ever changing stories.

If I can only get you to eliminate the daily hearsay bombardment, and you thereby can separate your emotions from your investments, you will become a better and less confused investor.

No, I am not jealous. I don’t begrudge anyone for getting a job that pays somewhere in the neighborhood of a few million dollars a year, requires traveling around in a private jet, giving speeches, pressing corporate flesh and dining privately in first class facilities.

This is not a fantasy job description, but simply my interpretation of the one that former Fed Chairman Alan Greenspan took when he signed up with bond powerhouse PIMCO a few weeks ago.

I am sure that he will be working in some capacity with bond guru Bill Gross, who oversees billions of dollars of PIMCO’s bond funds. I have no problem with that as long as Mr. Greenspan doesn’t use his new position, along with his remaining clout as ex-Fed Chairman, to make statements in public that move world markets and produce a desired outcome for his new employer.

After all, making a public statement by a figurehead with his reputation about, say, a weakening global economy could have very positive effects on his employer’s bond holdings.

That’s the problem I have with this scenario. Twice this year, after leaving office, we have seen Mr. Greenspan make comments in public that were, at least in my view, unsuited for an ex-Chairman because of their market influencing effect.

While he has not done so since taking on his new job, I sure hope that he is aware of the potential conflict on interest, and acts with a sense of responsibility that one should expect.

That brings up an interesting question to ponder. Should those public officials, who were appointed to powerful positions, such as the Chairman of the Federal Reserve (and others), be required to have a “quiet period” after leaving office?

The recent roller coaster ride in the stock market was caused by a variety of events, one of them which was a rise in interest rates.

If you held any income producing bonds, bond funds or municipal closed end funds, you undoubtedly have seen the values head south as they always do when rates are rising. Personally, I have watched the tax-free income portion of my portfolio go from about +1.50% to -3.00%.

This is a normal occurrence within an economic cycle, and you need to look at the income generating process with the right frame of mind. If you invest for income, and your funds/ETFs/CEFs pay monthly dividends, then that’s what you need to focus on. After all, the income is what will support your lifestyle and not the value of your portfolio.

Interest rates will always fluctuate and, in times of lower rates, you’ll have some potential for capital gains, while, during times of higher rates, you may see the value of your portfolio head south. Whether rates rise or fall has no effect on the underlying issuer to pay your monthly dividends, so don’t get too emotional about it.

Here’s another way to look at it. I have a friend who prefers generating monthly income from his real estate holdings. He owns several single family rental homes, which provide him with regular monthly income that he collects from his tenants.

In his area, real estate prices have come down some 20% off their highs. Translated, that means that the value of his real estate income portfolio has gone down by several hundred thousand dollars. I asked him if he was worried about that kind of price drop but his response was that he was living well off the generated income and that the value only mattered if he were to sell.

Obviously, even if he wanted to, he couldn’t just turned around and liquidate his real estate holdings overnight as you can with a bond fund. However, maybe there is lesson to be learned here, which is to focus on the purpose of your investment. If it does what it was designed to do, why worry about things that are beyond your control anyway?

However, I believe that no matter what you invest in, there should be some kind of ultimate safety net, in case the world goes haywire. Just like using the Trend Tracking Index (TTI) for growth investments, I will draw a line in the sand when I will sell my income portion. After all, I am old enough to remember 21% mortgage rates and 16% money market interest in the early 1980s.

While we may never experience that again (hopefully), my line in the sand for my income portfolio is a drop of -7%—just in case.

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

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

The bulls took over and all major indexes gained solidly for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs is now positioned +4.52% above its long-term trend line (red) as the chart below shows:

The international index has now moved to +8.94% 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.