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

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

Despite Thursday’s sell off, the markets eked out another gain.
Our Trend Tracking Index (TTI) for domestic funds/ETFs now sits +5.59% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +10.00% 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.

A few days ago, I wrote that the media does not like to include bear markets when reporting performance comparisons between mutual funds/ETFs and the S&P; 500.

Of course, I can’t read every financial paper in the universe, so my view is limited to those that I do read. Reader (and client) Nitin pointed out an article in the NYT that actually addressed the issue to a degree.

The heading was very appropriately named “Oops, It May Be Time To Rebalance That Portfolio.” It then goes on to explain the hardly impressive S&P; 500 returns when measured over the past 7 years.

Unfortunately, the article quoted John Bogle (founder of Vanguard) who is the icon of Buy and Hope investing. While his Vanguard 500 Index fund had big losses in 2000 and 2001 (how about 2002?), he would have broken even ahead of the S&P; 500 (in “only” 6 years as opposed to 6-1/2) because the fund reinvests dividends.

Yes, you are reading this right. Having had steep losses in the last bear market qualifies for boasting if your losses were slightly less than that of a similar index. How sick is that?

The article goes on to evaluate various portfolio allocations that would have broken even as early as the end of 2004. Sure, the benefit of hindsight…

Okay, then it’s time for the portfolio rebalancing act, where every ‘expert’ has a different opinion as to how it should be done. Articles like this make my hair stand up, because it’s the same drool I’ve been reading for about 30 years.

There never seems to be any change or improvement to dealing with the absurdities of Wall Street. How about this: Let’s try to avoid the brunt of a bear market altogether?

Some people are using the basic ideas of trend tracking in their investment approaches without even being aware of it.

I was reminded of that yesterday as I was reading Random Roger’s blog. Here are a few points he addressed, which are the essence of our trend tracking methodology. His points are excellent and he says, among other things, that:

1. Perma-bulls are not planning for a cold winter

True. Most people remain bullish no matter what and have no exit strategy to protect themselves from severe market reversals. While we will never sell at the top of the markets, we try to be within 10% of it.

2. Perma-bears are missing too much normal upside movement

True. While we can determine a potential top in the market only after it has happened, the same holds true at the bottom. However, with a clearly defined entry strategy, we attempt to be back in the market within 10% of the bottom.

3. Personally I don’t see the benefit in trading ahead of an Armageddon (intentional hyperbole) that has shown no signs of starting.

True. Guessing is what gets most investors into trouble. Usign trailing sell stops allows you to see whether the market is actually rolling over and correcting. Let that fact tell you when it’s time to get out.

4. I also think it is irresponsible for the perma bulls on the various TV shows to never talk about exit strategies, what signs to watch out for or even acknowledge the bear case.

Couldn’t have said it better myself. Most media articles and financial TV shows never make a case for the bear, as I have posted about before. Not only that, but performance figures conveniently only cover bull markets.

5. I also think it helps clients to acknowledge that down turns come, they should not be feared and that we have a simple exit plan to take defensive action when the next bear market starts.

Amen. These are 5 points that trend tracking accomplishes without becoming emotionally upset or suffering from sleepless nights.

Discomfort when investing almost always stems from the fact that you are uncertain and have no definite plan to deal with unforseen events. Once you resolve this issue, by being methodical in your approach, you will be less inclined to suffer emotionally (and financially) when markets go against you.

With new ETFs being brought to the market as fast as regulatory approval can be obtained, investors are gobbling them up at blazing speeds.

Total assets held in ETFs are approaching the $500 billion mark. Considering that it’s been only 4 years ago, that I wrote the article “No Load Mutual Funds Or Exchange Traded Funds?” designed to familiarize many readers with the benefits ETFs have to offer, their growth has truly been amazing.

While they still dwarf the mutual fund market (currently at some $9 trillion), their acceptance by the investing public has been phenomenal. You can see this increased awareness and interest by doing a search on Google for ‘mutual funds’ and one for ‘ETFs.’ The gap is much smaller there as the ‘mutual fund’ search results in 18.3 million hits vs. 11.5 million for ETFs.

Even more telling is the fact that, based on my own advertising experience on Google, interest in ETFs is 2 times that of no load mutual funds. In other words, I am getting twice as much response on ads promoting my free ‘ETF Tracker’ as opposed to my free ‘No Load Fund Tracker.’

Why does it matter?

As I have said before, if mutual fund companies don’t come off their high horse by offering lower fees and less restrictive trading rules, it will only be a matter of time before ETFs will become the predominant investment vehicle for many mutual fund investors.

Many attempts are in the works to have ETFs offered in pension plans and 401ks as well. If that comes to pass, the gap will close even faster.

I am in favor of any investment methodology that uses some type of reasoning for getting into an investment and, more importantly, getting out of it to either take profits or to limit losses.

Any such approach is better than the mindless “Buy & Hope—things will somehow work out in the long-term” way of thinking. While I am admittedly biased towards tracking trends, others use technical analysis to arrive at some kind of conclusion as to when to be in the markets and when not.

The article “Time to take Profits on S + P 500” describes seasonal tendencies and what resistance levels to look for. For the S&P; that translates into 1,528, which is the old high made in 2000. While technical analysis deals with many other issues, such as overbought conditions, keep in mind that just because an index has reached that level, it can stay there for a long time and a sell off is not necessarily imminent.

I have used some of these indicators 25 years ago, but found them not to be as reliable as the use of a trailing sell stop or the crossing of a major trend line. However, while technical analysis has some great tools, nothing beats following actual market behavior via clearly defined exit points to determine when it’s time to take the chips off the table.

Even though I am not specifically looking for it, I seem to come across articles dissecting the potential effects of either the SubPrime Loan debacle or the real estate bubble.

This latest one offers a sobering analysis of losses sustained from mortgage backed securities (MBS). While it has been estimated that so far some $100 billion has been lost, the potential is far higher as home prices decline.

I am not bringing this up to dwell on negatives, but to simply make you aware that the consequences of the housing bubble, and the reckless lending practices that accompanied it, can and will have far reaching effects.

If, as the article points out, the sea of losses in the MBS area continues (with a potential of trillions lost), your investments in mutual funds and ETFs will most certainly be affected. While this could be only one of many reasons for a nasty slide in the market, just be prepared and don’t become complacent.

How?

If you manage your own investments, follow my suggested sell stop discipline; or any sell stop discipline for that matter! Yes, it sounds like an old hat. But it’s the only way I know of to keep your portfolio intact if/when this bubble deflates like a hot air balloon.