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February 12, 2010


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1) An unsustainable rate of increase is fun if you know what to do. You don't sit back and greedily hope that it will last forever, as many have done. You set a stop based upon such things as fund volatility, a moving average, the relative strength index or whatever technical indicator works for you - you then watch the price every day and as soon as it drops through your stop you sell immediately. The basic approach is to let your gains run but cut your losses quickly. I used to keep a notebook with the results of a post mortem on every trade and make notes of what I did right or what I did wrong so that you learn from your mistakes. You need charting and analysis software, without it, it's like driving a car in dense fog.

2) Expense Ratios are no big deal unless you are a Buy and Hold investor of index funds.

3) The only other fee to be concerned about is a short term redemption fee for not holding some mutual funds a specified length of time. Always read the online prospectus before buying a fund.

4) Short term gains are GREAT. I don't know of anyone that became poor by making short term gains or paying a lot of income tax.

5) I always look at a fund's objective and its holdings before buying it

@Old Limey... you need another son? I wish you would manage my money! haha! How much time do you spend a day doing your investments? As I mentioned in an earlier post I'm changing day jobs and moving a bunch of money over. Now I'm thinking of either doing it myself or having someone else do it. I finally found a good money guy with lots of recomendations but I'm wondering if the cost is worth it.

This Is yet another useful article about investing. I'm definitely going to follow you! I'm new to the investing and I don't know where to start.

I'm consistently amazed at how people make investing much more complicated than it needs to be. Further confusing the hell out of me is that these folks invariably lower their after-fees, after-taxes returns in the process. I'm with you, FMF. Invest regularly in low-cost index funds, then sit back and forget about them. Your description was pretty accurate: easy peasy.

Interesting read. I've never heard of closet indexers. Sounds like a ripoff if they're charging higher fees than index funds!

As far as expense ratios varying widely, this can even be true for index funds that track the same index. Furthermore, some index funds also charge a sales load, which increases your expenses even more.

Those "other fees" often include portfolio turnover costs being passed on to the investor, and that figure isn't disclosed on prospectuses (although the turnover rate usually is).

Great reminder to keep the majority of your investment dollars in index funds!

I like the idea of using the index funds - plus they are also very liquid. So should you need to cash out, there are no liquidity obstacles to do so.

@Jay - I think the issue is if you desire to maximize your returns. Sitting back on auto if fine but if you are active or hire someone who is active then you can do much better than auto. This is where I am. I've been on auto for years but would like to increase the returns. You can be greedy but you can also be a bit smarter. The problem is time and knowledge - the time to watch things closely and the knowledge of how to buy/sell actively for better returns. This is when things get complicated.

Texashaze . . . good luck beating those markets. I wish you the best of luck but if the majority of professional money managers can't consistently beat the market I hope you've got a trick up your sleeve. :)

The way I invested from 1993 until 2007 took up lots of time and would not be practical for someone that is away from their home and computer, and with other very pressing responsibilities that consume the majority of their time. I didn't even start getting into it until I was about 59 and retired. Also the company whose proprietary database that I used had a closely knit group of several hundred 'addicts' like myself that communicated all the time by means of an internet Bulletin Board that no longer exists, many of us also attended an annual conference of all the database users held at a different city each year. I learned an immense amount from older and very experienced users in my early days and also from the conference presentations by 'third party' software developers like myself. There were a couple of guys that were experts in market timing, others in backtesting and others in fund selection. When I started programming some of their suggestions and e-mailing my software to the group the collaboration and interest really took off. It also helped that we were in a really good market environment for many years and that I wasn't investing in a vacuum - I was getting lots of ideas from others.

By the end of 2007, I was 73, had been retired comfortably for 15 years and no longer needed to strive for high returns, and decided to move from the fast lane to the slow lane, where I am today. Currently I have 47% in CDs for our IRAs, 46% in municipal bonds for our Trust account and the other 7% in two mutual funds, one is a muni bond fund, the other is a short term corporate bond fund. The reason for the 7% is that there are no longer any good values in CDs or municipal bonds and I have to reinvest the interest somewhere. I also like to keep some funds around for such things as making the annual IRA distributions from the IRAs into the Trust account, and also for raising cash for taxes, vacations etc.

I hope I can retire as early as you! I'm not the most well informed investor yet, though. ;)

Interesting article. I 've never heard of indexers of the closet. Sounds like a scam if they're charging higher fees than index funds!

I much prefer FACTS over anecdotal opinions. As Jack Webb used to say on TV, "Just give me the facts Ma'm".
I just did a ranking on all of the actively managed equity funds that are available to retail investors in Fidelity's Funds Network. I only included those that have existed for the last 5 years.
I also included the index for the Wilshire 5000, a broad indicator of the whole market.

There were 1,346 funds.
I ranked for the 5 year period from 2/12/05 to 2/12/10.
The Wilshire Index lost money and had ANN=-0.96% (ANN is the annual compound rate of return)
The database used adjusts for all fund distributions.

1058 funds beat the market.
287 funds performed worse than the market.
3 funds had ANN greater than 20%
58 funds had ANN greater than 10%
195 funds had ANN greater than 5%

If I were investing in equity funds (which I am not) I would start with the best 195 funds and see how they did for a variety of different time periods, and gradually cull the list from 195 to a smaller and smaller number. I would then take about a dozen of the top candidates and see what sector they invested in and what their holdings were. I would also look at their volatilty, their risk adjusted return, and the maximum drawdown they had in each of the various ranking periods. Finally I would examine the charts of each final contender over different time periods until I had what I thought were the best 4 or 5 funds.

That is intelligent fund selection, admittedly based upon past performance. Buying and holding a few funds that track broad market indexes is settling for MEDIOCRITY right from the start. With data, arranged into fund families and with many fund selection and charting tools that allow you to rank by a variety of statistical measures you can rise above mediocrity and outperform the majority of investors. However it takes time, experience and a little money to obtain the needed tools. Money managers are a lot more expensive, the best ones also take a significant cut out of your profits.
I like to actively manage our own money but it's not for everyone.

I admit that I'm an indexer and I have been guilty of "shunning" active funds and money managers. However, I think Old Limey's post really clicked with me in the sense that indexing isn't necessarily the end all be all of investing. I still believe that it's the best method for someone like me who doesn't necessarily want to spend the time learning and researching my own funds. But for others more inclined, I don't think it's automatically considered bad for them to chase after higher returns, given that they know what they're getting themselves into.

Thanks for the thought-provoking replies Old Limey. There are always nuggets of wisdom I get from reading them. :)

I revisited the 1346 funds that I mentioned earlier and ranked by various statistical measures.
I have found that 'Volatility' can be the real killer. Funds that can drop a huge percentage in just a few market days are scary to own and people can become paralyzed as to what to do when they start hurtling downwards at a high rate. Low volatility funds are much easier to manage since they tend to form a rounded top before heading slowly downwards, thereby giving you much more time to make your decision.

Over the same 5 year period as before I ranked as follows by 4 different measures:

By Volatility
The best fund was a Value fund with an ANN=2.8% but its worst possible drawdown was still -32%
By Risk Adjusted Return
The best fund was a Gold fund with ANN=17.7% but its worst possible drawdown was -70%
By Annual Rate of Return
The best fund was an International fund WITH ANN=24% but with a worst possible drawdown of -70%
By Maximum Drawdown
The best fund was a Blue Chip Growth fund, with ANN=8.3% and a worst possible drawdown of -19%
The Wilshire Index of 5000 stocks, with an ANN=-.96% had a worst possible drawdown of -57%.

The measure of worst drawdown is very significant. It means that if you bought at the highest value there would be a day during the 5 years when you would have a gut wrenching huge loss (-70% in two cases above) and you have no idea whether the loss is going to get much worse or whether it will lessen. That's a quandry I do not subject myself to, my pain threshold and personality won't permit it. This is why I have rarely been able to hold a fund for longer than 6 months. I never put myself in that terrible position.
------[If you take a 70% loss, $1000 becomes $300. You then need to have a 333% gain just to get even.]------ That's how to become poor in a hurry, not wealthy.
Diversification is generally a great idea, however when you find yourself in something like the bubble or the 2009 market between March and year end, it's time to move heavily into the best sector and ride the wave upwards until it crests.
In the bubble it was High Tech Growth and in 2009 it was Junk bonds that had an unbelievably low volatility, very steep, ride up that started on 3/9/09 until topping out a month ago on 1/11/10.

Unfortunately many investors that use Buy and Hold are not even aware of which sectors are good. How would they if they don't have the data, the fund families grouped by sector, the ranking tools, and the time to do the work.

Well folks...the comments have been interesting and I've had no clue what they really said...except for a couple. I'm a 58 year old woman who worked for almost twenty years at a newspaper. I contributed the max to my 401K...up to 15%. The recession knocked out 30K. That hurt my Scot/Irish nature terribly.

I rolled the remaining $110,000 over to Vanguard. 25k is in a money market slowly growing..not much but not losing. The remaining 85k is in a retirement account - mid level risk and so far I've lost 2k. It's been 4 months. I know that's a short amount of time. We never had the option at work of where the money was invested as our publisher was a former stockbroker. I got a list and they were all core domestic stocks. I check them everyday and for the most part, they're always up. I don't know how Vanguard works as far as my picking my own stocks. I'm domestic up to international and don't know where the money is being lost. This will be my retirement money even though I'm already retired. I'll have to work part time which is fine. I have NO credit card bills and only owe about 59K on my house. Low mortgage payment since I put more than 20% down.

What you've probably already figured out by now is that I know NOTHING about investing. I may need to liquidate some of this but I don't want to if at all possible. Also, I have a retirement ( believe it or not ) that I can start taking from the company though at a loss because of my age. If the newspaper fails, I don't know if I'll lose that retirement. Should I take the maximum amount out now and invest some ?

Thanks for your help, everyone. My brothers got all the math genes in the family.

You might want to confide in your brother. Vanguard's website at is quite easy to navigate and they have all of their funds arranged by category with year to date results and results for various periods. You need to navigate to 'All Vanguard funds' and then select 'Bond funds'. Don't even think about stocks with the amount of money you have, go only in mutual funds.
Your $25,000 in a money market fund is earning you 0.03% which amounts to about $75 for a whole year - that's ridiculous - you can't leave it there.
In your situation I would minimize my risks and preserve my capital by investing in one of Vanguard's 27 bond funds. The market is looking dangerous to me so I would stay away from stock funds and high yield bond funds at present. If your money is all in an IRA then taxable bond funds are OK. If some of it is in a taxable account you might want to consider one of their municipal bond funds for that money. They have Federal and State tax exempt muni bond funds for CA, NY, PA, NJ, MA, OH.
VFICX, holds intermediate term investment grade corporate bonds, YTD return=1.81%, One year return=20.11%.
VFSTX, holds short term investment grade corporate bonds, YTD return=1.27%, One year return=13.44%.
I wouldn't put all your eggs in one basket, go for 3 or 4 funds. You can't afford to lose money at this point in your life and in these very uncertain times.
Good Luck!

@SwampMouse - I'd second Old Limey in staying away from stocks given how little money you have and also your age. There are still zillion of problems in the financial system and if we have another crash you don't have 20 or 30 years to wait until the market comes back.

But... Given that interest rates are very low now and have nowhere to go but up, I'd stay with CDs. Bonds aren't risk-free. When interest rates go up, bond values go down. Bond funds had great one year return because a year ago we were in credit crisis, and even investment grade bonds of good companies were selling at large discounts and yields-to-maturity approaching 9%, at least in financials. Since then all bonds went up closer to where they should be given their rates and credit rating. Yes, a year ago it was a great time to buy bonds. Now - I am not so sure. If the economy improves, the Fed will start raising rates. The moment they do, your bonds will lose value. If the economy doesn't improve, the credit risk of many companies in bond funds is likely to go up.

My humble opinion. But... I do have a couple of bond funds in my 401K that I bought a little over than a year ago. Now, I transferred all the money from my long term investment grade bond funds to stable value; I still keep midium duration bond fund because I think the rates aren't going up immediately, but I am keeping my eye on it. I keep my individual bonds (you don't have enough money for those), but for the moment the yield-to-maturity on those is still attractive enough compared to other fixed income investments.

So in your place I'd keep most of my money in CDs. Maybe invested a small percentage e.g. 20K, but not most.

Thank you so much Old Limey and kitty. I did ask my brother if he knew anything about the stock market and he was very vague. Obviously, he didn't or didn't want to share his knowledge with me. So the advice is good from you two, my new adopted brothers. Thank you so much. I certainly can't afford to lose money at my age and this isn't really very much money in the big picture.

Just for fun, I put $1500. in my credit union CD and it draws 4%. I thought that was pretty decent. I've heard from several sources that this was really a mini recession and the big one will hit soon. I wouldn't be surprised.

One more quick question. Do you think it would be wise to pay off my house and have and rent it ? I'd have a company manage it for me as I don't want to stay in the swamps anymore. I know that real estate is always a good investment and here, it will always be as we have fewer homes due to hurricane damage. My house is perfectly situated in a sheltered area and never receives much damage. It has appreciated greatly since I bought it ten years ago. Thanks, my new brothers.

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