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  • The $100,000 Buy-and-Hold Challenge

    This week, I'm going to hand the reins over to Roger Schreiner, one of the early pioneers of active money management, and allow him to fill you in on a challenge he made last year to John Bogle of Vanguard Funds fame. Roger has studied and observed active and passive management strategies for decades and feels, as I do, that active strategies can provide superior risk management. Roger's conviction is so strong that he challenged Mr. Bogle to a contest that would prove which strategy would come out on top over a given period of time, with $100,000 going to the winner's charity of choice. Mr. Bogle didn't accept, so Roger later widened the challenge to any passive money manager. Still, no takers.

    While most active managers put their 'money where their mouth is' by investing in their own programs, Roger has gone one step further by issuing a direct challenge to one of the most prominent adherents of buy-and-hold strategies, and risking $100,000 of his own money in the process. I think you'll enjoy reading Roger's challenge as well as his arguments in favor of active management. After his discussion, I'll debunk a few of the more common rebuttals that Roger has received since issuing his challenge. If you are struggling with deciding how to get back into the market, I think you'll find this week's E-Letter to be very interesting.

  • Anatomy of a Stock Market "Meltup"

    As the principal of an investment advisory firm, I have to admit that the stock market sometimes causes us to scratch our heads, wondering what in the world it's up to. As the current market rally continues unabated, this is definitely one of those times. In 2009, the S&P 500 Index soared 65% since its lowest closing value in March and ended the year up over 23%. However, this huge rally seems to have driven stock prices beyond where they should be based on the economic fundamentals.

    Even more confusing is the fact that statistics compiled by the Investment Company Institute (ICI) show that domestic equity mutual funds have had net outflows of money (more withdrawals than new investments) over the past five months, meaning that retail mutual fund investors have been heading for the exits in favor of cash or other asset classes. So, how can it be that the market goes up even though investor sentiment for domestic equities is still decidedly bearish?

    The answer may lie in an obscure market phenomenon known as a 'meltup,' which is a momentum-based rally that usually bears little relation to the underlying market fundamentals. This week, we'll delve into the anatomy of a stock market meltup, discuss possible reasons why stock prices went higher even as retail investors were pulling money out of domestic stock mutual funds and speculate as to whether the meltup might continue in 2010.

  • My Genes Made Me Do It!

    For many years, I have written about the Dalbar Organization's Qualitative Analysis of Investor Behavior (QAIB) study. Now in its 15th year, this study has consistently documented how investors' returns do not match those of the major market indexes because investors constantly jump from one hot investment to another. While Dalbar showed us how investors returns suffered, we were left wondering why investors acted as they did.

    The answer to the 'why' question may now be found in a recent study showing the part genetics play in a person's investment behavior. The 'Nature or Nurture' study found that up to 45% of a person's investment behavior may be attributable to genetics. Some genetic influences are good while others are not. The Nature or Nurture study also found that genetic investment behavior can persist even after considerable investment education. In other words, nature trumps nurture.

    I recognized long ago how some investors can be their own worst enemies, and now I know that their genetics are likely at fault. Fortunately, I developed a way to overcome some of the detrimental genetic behaviors long ago. If you've ever made a bad investment decision and kicked yourself later on for doing so, you need to read this week's E-Letter.

  • Dalbar Update: Investors Still Lagging The Market

    The Dalbar organization recently completed the 15th update of their landmark Quantitative Analysis of Investor Behavior (QAIB) Study. As long-time readers know, I have often quoted statistics from these annual updates that show average investors receive inferior long-term returns when compared to gains posted by stock and bond mutual funds. The reason, by and large, is that investors switch from fund to fund chasing hot returns. In doing so, they often end up with low returns, and sometimes even losses. Most interesting, however, is that the 2009 Dalbar QAIB Study update finally comes to the realization that traditional buy-and-hold approaches do not work, and that investors continue to panic and trade out of stocks when losses run high. In other words, emotions often trump rational investor behavior. This week, I'll update you on the most recent Dalbar Study findings, and also discuss our solution to emotional trading that we discovered back in 1995.

  • The Stock Market Conundrum

    The market goes up, the market goes down. Will we have a sustained rally, or is this just a 'sucker rally' that will soon end with a significant downturn? As we look to the experts to help answer these questions, we find that their predictions are all over the map. Many quantitative models are saying the market is severely overbought, while those relying on fundamental analysis say the market is fairly priced. It seems that the more 'expert' opinions we get, the more confusing it becomes for investors to know what to do.

    The biggest question for investors who are currently on the sidelines is whether they have missed the majority of the bull market rally, or if it still has a way to go. This is especially true in the case of Baby Boomers, whose retirement nest eggs have been hit by two major bear markets within a decade. They need the growth that the market has the potential to produce, but can't stand another major down market, which may also be in the cards.

    This week, I'm going to discuss the various viewpoints both for and against a sustained market rally. As you will see, both sides are supported by facts, figures and historical precedent. They can't both be right, but both could be wrong should the market be headed into a broad trading range.

  • The Case for High-Yield Bonds

    High-yield bonds, otherwise known as 'junk bonds,' have enjoyed spectacular gains so far in 2009. Both the Barclays and Merrill Lynch high-yield bond indexes are up over 40% year-to-date as of August 31st, and inflows to high-yield bond mutual funds is at or near record levels. What these investors may not know, however, is that high-yield bonds, besides having a higher risk of default, also have a higher correlation with equity markets than other types of bond investments. As a result, high-yield bond investments can be very volatile.

    Fortunately, there is a way to invest in high-yield bond mutual funds within an active management strategy that can go to cash when the high-yield bond market turns negative. This week, I'm going to feature a whitepaper on high-yield bond investing by Steven D. Landis, CFP, co-founder of Sojourn Financial Strategies, LLC. Steve's paper will not only provide some valuable background on high-yield bonds, but will also discuss why an actively managed high-yield bond program may still be a good investment in 2009. After that, I'll discuss Sojourn's Columbus High-Yield Bond Program that Steve manages. I think you'll find this program to be a viable way to introduce additional diversification into your investment portfolio.

  • A Case of Mistaken Identity - The "Other" Gary Halbert

    The Internet is a wonderful thing, but it can also be very frustrating when there is a case of mistaken identity. I have written a number of times about another 'Gary Halbert' that appears when readers do a web search on just my first and last names. And even though Gary C. Halbert died two years ago, he still has a very prominent presence on the Internet. So prominent, in fact, that I don't appear on most searches until somewhere on the second page of links.

    If that's not bad enough, Gary C. Halbert has a number of very unflattering posts related to his activities when he was living. Whether these are accurate or not, they create a problem for me if my current or prospective readers or clients were to think these negative posts are about me. This week, I'm going to again discuss why it's always important to use my middle initial "D" when you do a web search on my name. I'll also provide some background information on myself and my company so that you can feel more comfortable with the person writing to you each week.

  • Millionaires' Club - Record Plunge In 2008

    A new report released earlier this month found that the global slump in property and equity markets last year cut the number of millionaires worldwide by 15% to 8.6 million, wiping out two years of increases in wealth. The value of the world's millionaires' assets fell 20% in 2008 to $32.8 trillion, after a 9.4% increase in 2007, according to the latest report. The study also found that the super-millionaires ($30 million and up) got hit even harder than the mere millionaires, which is even more interesting. Even if you are not a millionaire, there is a lot to be learned from this annual report from reputable sources....
  • When Will The Bull Market Return?

    I'm going to be out of the office most of this week spending time with my son who is home from college on Spring Break. Since we live on Lake Travis near Austin, I'm sure he'll have me driving the boat while he and his buddies ski and wakeboard. That being the case, I'm going to reprint an excellent article by David Henry entitled "When Will the Bull Return?" David brings some good insights in to how stock market cycles work, and just how long it might be before the current bear market comes to an end.

    Unfortunately, Mr. Henry's note of caution is not being heeded by Wall Street. The Dow Jones Industrial Average (DJIA) climbed just over 9% last week, prompting many bull market cheerleaders to proclaim that the stock market has hit the bottom and its now on the way back up. While this may be true, it is also a fact that there have been many "market bottom" calls over the course of this bear market and, so far, they have all been wrong. After the article reprint, I'll briefly discuss why I think Wall Street so desperately needs a new bull market.

    Then, I'm going to share with you a way to begin introducing active management strategies into your own portfolio. By making "half a decision," you can test the waters of active management without totally abandoning other strategies that you may now employ. Buy-and-hold strategies are fatally flawed, so maybe its time you tried something else....
  • Beware: Bear Market Brings Out Tall Tales!

    This week, I'm going to share my thoughts about a couple of the recent investment-related articles I have read. The first article documents the day in February when the stock markets hit the milestone of having fallen 50% from their October 2007 peaks. Of course, this means that index investors will now have to earn 100% or greater returns just to get their accounts back to break-even. I'll also note how market action since that article has now taken the major market indexes even deeper into the red. The market's action over the past eighteen months or so highlights my frequent advice to include investments that employ active money management strategies in your overall portfolio. While there are obviously no guarantees, the ability to move to cash or hedge long positions can potentially help to minimize losses, especially during bear markets. This brings us to the second article. Many large mutual fund and brokerage companies have a vested interest in seeing discredited buy-and-hold strategies continue. Thus, it was not a surprise when I learned of a study sponsored by a major mutual fund company that supposedly showed the superiority of buy-and-hold over the active strategy of market timing - even in this bear market! It was also no surprise that the study was based on flawed assumptions that skewed the results in favor of buy-and-hold. I was surprised, however, that the Investor's Business Daily publication reported on the flawed study as if it were legitimate advice. In the E-letter, I'll point out how the mutual fund study was fatally flawed, and hopefully show you how to avoid taking such articles and studies at face value, even when they are published by seemingly legitimate sources....
  • A Eulogy For Buy-And-Hold Investing

    I have recently written about the demise of buy-and-hold investment strategies sold under names such as asset allocation, passive investing, index investing, Modern Portfolio Theory, etc., etc. However, there are those in the financial services industry who are trying to revive this relic of a bygone bull market. This week, I'm going to take on those who support buy-and-hold strategies, and tell you why they may have vested interests that won't allow them to let go of this failed investment strategy. I'll also update the performance of two of the actively managed programs I wrote about in 2008. I encourage you to take out your year-end investment account statements and compare them to these programs....
  • "Buy-And-Hold" Bites The Dust - Now What?

    While there has always been debate about the value of buy-and-hold investing, the last decade or so has really dealt a blow to this passive investment strategy. I have always said that the long-term statistics (some spanning 75 years or more) used by passive investing proponents to "prove" their point are totally unrealistic in relation to the actual time horizons of many investors. Over shorter periods of time, a buy-and-hold portfolio can suffer major losses, possibly right at the time investors need their money the most. Now is just such a time. After suffering through two major bear markets since 2000, individual investors and even many professionals are seeking out the kind of actively managed investment alternatives that I have recommended since 1995. This week, I'll revisit the perils of index investing, as well as provide a brief economic overview....
  • Retirement Focus - What Now???

    This week, Mike Posey will complete his series of Retirement Focus E-Letters discussing the various ways to invest for income during retirement. Before doing that, however, he provides some very good advice for those who are in retirement and concerned about the health of their portfolio during the market's recent nosedive. After that, he uses my discussion from last week about active management strategies as a springboard to how these strategies can be effective for retirees. He then wraps up the series by talking about a number of alternative investment strategies that may be of interest to some retirees....
  • On The Economy And Active Management

    Recent economic reports continue to signal an economy that is spiraling into a recession. How deep and how long that recession may be is anyone's guess, but I think it's beyond question that a major slowdown is in our future. Of course, this also means sluggish corporate earnings, a depressed stock market and a lower demand for goods and services. With trillions of dollars of wealth now devoured by the subprime monster, the natural question is how to invest in an uncertain market. Fortunately, we have the answer for you as I will explain this week after reviewing some economic data. This is not an E-Letter that you'll want to miss....
  • Category 2 Hits Texas, Cat 4 Hits Wall Street

    While Hurricane Ike ravaged the Gulf Coast over the weekend, there was a major financial storm on Wall Street on Saturday and Sunday. Lehman Brothers, the fourth largest US investment bank, announced on Sunday that it was filing for Chapter 11 bankruptcy. Shortly thereafter Bank of America announced that it was gobbling up brokerage giant Merrill Lynch for a mere $45-50 billion in stock. If that weren't enough, insurance giant AIG is in serious financial condition and is requesting $70-75 billion in new loans to stay afloat. These latest developments are the next chapter in the subprime mortgage/credit crisis, and they took a heavy toll on the stock markets yesterday. I will sort it all out for you in the pages that follow....