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Coming Soon - The MUTUALdecision Newsletter!
2008-01-09 13:31:00
To provide our readers with even more informative content, we have created the MUTUALdecision Newsletter .  The Newsletter will replace our Blog and will be emailed to you for FREE on a weekly basis starting on January 21, 2008.    In our Newsletter we will continue to provide insightful commentary on mutual fund investing and market outlooks that you found in our Blog. In addition, we will feature our Top Mutu al Funds sections based on data from the MUTUALdecision Academic Models and abstracts of leading academic research on fund investing.       Thank you for reading our Blog and we hope you continue to enjoy our articles and information in the MUTUALdecision Newsletter.  
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2008 Economic and Investment Outlook
2008-01-02 15:07:00
The economy faces serious challenges in 2008: 1. New home sales are at a 16 year low and may go lower;  2. Inflation will be high for the next few months as energy and food prices work their way through the economy;  3. Retail sales will be weak, as evidenced by the Christmas season;  4. Illiquidity in the credit markets will spread from mortgages to auto loans and credit cards due to financial companies tightening their lending standards;  5. Adjustable rate and subprime mortgage problems will continue; 6. Corporate profits will turn negative. These factors will contribute to, but not cause, the 2008 recession and they will be somewhat mitigated by strong export demand (thanks to the weak dollar) and, at least for the time being, good unemployment numbers.   The decline in the value of existing homes is what will cause the 2008 recession and cause it to be the most severe recession since the early 1980s (although not all that bad by histori...
More About: Market , Investment , Outlook , Mutual Funds , Economic

Investment Tax Strategies for the Holiday Season
2007-12-19 13:58:00
The countdown to the New Year has begun but before the ball drops, actually before 4 PM EST on that Monday, review your investments and place your sell orders for tax-driven transactions.  For stocks and other securities, make sure your order is placed in time for it to be executed. This is particularly important for thinly traded stock and bonds. Taking a loss will offset gains and you can take an additional $3,000 of losses (on a joint return; $1,500 on a single return) in excess of capital gains as a deduction on your income tax returns. For the maximum advantage, try to offset short-term gains with short-term losses and long-term gains with long-term losses.    For mutual fund investors, even if you haven’t sold any funds this year, you still many have a taxable capital gain. Mutual funds must pass through their net capital gains or losses, and income, to their holders. Give your fund a call if you haven’t heard from it about its ...
More About: Holiday , Investment , Strategies , Investing , Season

Vicious Circles
2007-12-17 15:10:00
For the week, the Dow was down 2.1%; the S&P and NASDAQ were off about 2.5%. The new news was inflation. The Producer Price Index increased by 3.2%, in November and 7.2% for past twelve months. The Consumer Price Index was up 4.2% for the same twelve month period. The primary culprit was energy. Gasoline prices increased 35% last month. The only reason the CPI wasn’t up as much as the PPI is that energy companies have been reluctant to pass along price increases for fear of government backlash. Energy prices have been rising, in part, due to a declining dollar. With a $60 billion monthly trade deficit, the world is awash in dollars. This puts further pressure on the dollar, driving up the cost of imports, particularly energy. This is a vicious circle.   The old news last week was the housing and financial issues. The financial crisis has tightened credit standards for all potential mortgagees. (These tough new l...
More About: Economy , Market , Mutual Funds

The Bobbing Cork
2007-12-03 14:16:00
The stock market rebounded this week like a cork popping up after a fish wiggles off the hook. The Dow opened the week below 13,000, declined to 12,725, then railed 647 points to close on Friday at 13,372. The S&P and NASDAQ turned in similar performances. From a 10% correction, fears of a meltdown in the financial sector and recession the preceding week, the market rallied for four consecutive days and closed at its high for the week. What caused this swing? Equity investments in Citicorp and e*Trade demonstrated that capital was available for the financial sector and the financial stocks rallied on the news.  Treasury Secretary Paulson proposed a moratorium on rate adjustments for certain subprime mortgages and Fed spokespersons, including Chairman Bernanke, hinted at the possibility of another rate cut in December. And, overshadowed by all the good news in the financial sector, oil closed at $88.70 a barrel, below $90 for the first time in w...
More About: Economy , Market , Mutual Funds , Cork

Making Exchange Traded Funds (ETFs) Work for You
2007-11-14 20:06:00
Exchange traded funds are index funds which have advantages over open-end index mutual funds. ETFs trade all day long on the stock exchanges, may be purchased through any broker, have lower fund expenses than mutual funds, and have less likelihood of generating unwanted taxable gains than mutual funds. (See The ABCs of ETFs – Exchange Traded Funds ).     There are a number of reasons, which we’ll discuss, for investing in index funds (ETFs or mutual funds) but let’s start with the fact that the S&P 500 index beats 80% of all actively managed funds. (And, an index fund has lower expenses than an actively managed fund, further enhancing its net return.) If you can invest in an index fund and be in the top 20 percentile of fund returns, that’s a pretty good place to start.    You can construct a well-diversified portfolio entirely out of ETFs.  There are ETFs for almost every type of investment you can im...
More About: Work , Investing , Exchange , Mutual Funds

What a Difference a Month Makes
2007-11-12 13:29:00
Ugly describes the stock market last week. The Dow and S&P were down approximately 4% and the NASDAQ was down 6.5%. The Dow and S&P are approaching their lows for the year, reached during the August credit crisis. It’s hard to believe that just a month ago the Dow and S&P were at record highs and the NASDAQ was at its highest level since 2000. Market sentiment is decidedly negative or, to reuse my opening word, it’s just plain ugly out there. It wouldn’t surprise anyone if the market hit a new low for the year this week.           ;      &nbs p;      &nb sp;   October High      August Low      Nov. 9 Close         Dow      &n bsp;      & nbsp;         1...
More About: Economy , Blog , Mutual Funds , Fund

The ABCs of ETFs - Exchange Traded Funds
2007-11-07 15:38:00
Every investor should consider Exchange Traded Funds (ETFs).   The younger brother of open-end index mutual funds is growing up fast and showing greater versatility.   ETFs defined ETFs are open-end index mutual funds that trade like stocks (and closed-end mutual funds).    Types of ETFs There are three legal structures of ETFs: Open-end mutual fund (the difference between the ETF structure and a open-end mutual fund is the ETF is exchange traded, whereas the traditional mutual fund is purchased and redeemed by the fund itself), Unit investment trust and Grantor trust.   The open-end mutual fund structure has a diversification requirement, mandated by the Investment Company Act of 1940, which limit how it mimics some smaller or specialized indices and could result in a tracking error. The other principal difference for the investor is that other than the open-end mutual fund, dividends must be paid out in cash to investors (of cours...
More About: Exchange Traded Funds , Chang , Chan

Climbing a Wall of Worry
2007-11-05 14:42:00
The S&P and the NASDAQ were flat last week. The Dow was down about 200 points, the result of its 300 + point sell-off on Thursday.  Citigroup was the culprit.  Its bigger than expected write-downs cost the Dow and cost its CEO his job. With the CEO of Merrill losing his job at the beginning of the week, it turned out to be a very bad week for financial company CEOs. (Is the CEO of Bear Stearns next?) All the financial stocks suffered as a result of Citi’s and Merrill’s woes but the cause of their woes is old news. We already knew about the subprime and collateralized debt problems and we knew the third quarter was going to be bad for banks and their brethren.    The Fed cut rates by ¼ point. Cuts in Fed Funds rates usually boost financial stocks. Not last week. The jobs report on Friday was tremendous. 166,000 new jobs were created, twice the estimate, and well above the 100,000 mark,...
More About: Economy , Market , Wall , Mutual Funds , Worry

Hitting the Curve Ball
2007-10-29 13:25:00
The market enjoyed a good week last week with the popular averages increasing by more than 2%. The market focused on good earnings growth from technology companies, continued strong international demand, and reassuring news about the mortgage morass. The market shrugged off $90 oil and forgot about its principal worry of the preceding week – Structured Investment Vehicles (SIVs). Energy and SIVs are serious concerns. Squeezed refiners margins, and fear of government action, have limited the increases in the price of gasoline but how long can that continue? Further increases in the price of oil will have to be passed along, if not now, next spring when gasoline demand begins its seasonal increase. Even more worrisome is the impact of cold weather on home heating costs. SIVs are off balance sheet investments (remember Enron), so nobody really knows what going on with them but its safe to say that the question of the quality of their investments hasn...
More About: Market , Markets , Mutual Funds , Curve , Ball

Indexing for Passive Aggressive Investors
2007-10-24 14:18:00
Let’s dispel the notion once and for all that index funds are only for passive investors. Sure, the original index funds tracked the S&P and were meant for investors who either believed you couldn’t beat the market or didn’t want to try. Since their beginning, index funds have expanded their breath. You can find a fund which tracks any of the major indices and most industry sectors, such as health care and technology. The first cousin of index funds, Exchange Traded Funds (ETFs), do the same thing – they track indices. Between index funds and ETFs you can mirror any major index, small index, industry sector, industry sub-sector (i.e., biotech or software), global region or individual country. You can also try to outguess the indices if you want. For example, you can buy a S&P index fund which weights all 500 stocks equally or one which weights them by market cap, and so on. (Note to investors: make sure you know...
More About: Investing , Mutual Funds , Investors , Indexing , Passi

International Investing in The Age of Turbulence
2007-10-10 13:36:00
Alan Greenspan writes extensively about the global economy in The Age of Turbulence.  He believes there are common dominators to economic success. One is a cultural desire for growth, which includes government integrity, the acceptance of a certain amount of income inequality, incentives to take risk and the willingness to let market forces determine supply and demand. Markets are the antithesis of government decision making. The fall of Russian communism showed the fallacy of central planning. The socialism of Western Europe and the populism of Latin America are lesser forms of substituting the wisdom of government for the marketplace. Western Europe (India and elsewhere) suffers from bureaucracies with extensive approval processes which slowdown change and bureaucrats who substitute their judgment for the market. Restrictive work rules imposed on employers drive up costs and reduce the incentive to take risk, resulting in lower growth and, perve...
More About: International , Investing , Mutual Funds

The Government was the Last to Know
2007-10-08 14:05:00
There were 110,000 new jobs filled in September, slightly above forecast and a good showing. The July and August numbers were revised upwards. The August revision was startling, going from a net loss of 4,000 jobs to 89,000 new jobs created. The discrepancy was due to the underreporting of jobs filled in the government sector. Gives you a lot of confidence in the government and their reports, doesn’t it? It also shows the danger of reacting to one month’s data, i.e., August’s initial report. The three months taken together suggest continued, albeit slow, economic growth.   The stock market, as usual, anticipated the stronger than thought economy. It had recovered almost all of its losses since its July high and, on Friday, the S&P 500 and Dow both had record high closes. Goes to show, you shouldn’t try to out guess the market and the wisdom of investing for the long term.   With new jobs creation reced...
More About: Government , Market , Mutual Funds , The Go , The G

Mr. Greenspan's Investments
2007-10-02 15:12:00
In The Age of Turbulence, Alan Greenspan outlines his vision for the world, and particularly the United States, between now and 2030. He chose 2030 because that’s when the last of the baby boomers reach age 65 – retirement. And the impact the baby boomers have on the world’s economy as they shift from being producers to consumers of capital is a major theme of his book. (If you don’t want to read it all, chapter 25 summarizes his arguments and predictions.)   In 2030, Mr. Greenspan forecasts the real U.S. GDP will be 75% greater than today. That may sound like a big number but it’s only 2.5% annual compound growth – well within historical norms. That’s the good news. The bad news is forecasted increases in inflation and, correspondingly, long term interest rates. Inflation could rise to the 4-5% level and long term U.S. Treasuries to 8-9% yields due to stresses caused, in part, by rising social secur...
More About: Real Estate , Investing , Mutual Funds , Investments

Marking Time
2007-10-01 13:43:00
Last week we received further evidence that the August credit crisis is resolving itself in orderly fashion. The First Data buyout went through and investors eagerly snapped up the debt to finance it.  The buyers of Harman and Sallie Mae reneged on their purchases. The prices were just too high in today’s rational debt world. Credit market problems and subprime mortgages are old news. As I’ve written about before, adjustable rate mortgages that re-set based on LIBOR will be a problem (see The Economic Crises of 2008 and On the Rebound), so the housing/mortgage market isn’t out of the woods yet.   New homes sales dropped to their lowest level in seven years (still, not bad compared to the long term average for annual new homes sales) and the sales prices dropped by 8%. This is a cyclical slowdown in the new homes market and is separate from any mortgage problems, but if it is coupled with a decline in value of existing homes...
More About: Economy , Market , Time , Mutual Funds , Recession

AI: Alpha and Index Funds
2007-09-12 17:54:00
A current theme among Wall Street wealth managers is for individual investors to have index funds as their core holdings and to focus the remainder of their assets in high alpha investments, which will produce returns not correlated with the market.    A quick digression for those of you who aren’t familiar with alpha and beta. In traditional finance, the return not correlated with a broad market index, such as the S& P 500, is referred to as alpha. The return which is correlated to the market is beta.  An index fund should have the same return (positive or negative) as the index it mimics.  (One of the controversies surrounding some ETFs is their performance has not tracked their underlying index.)   The theory behind Alpha and Index Funds is multifold:  1. the major indices are a good place for an investor to be, both from a risk and return perspective;  2. you can’t outperform the major indices, so don’t waste...
More About: Investing , Mutual Funds

Living for the Moment
2007-09-12 03:43:00
The stock market was living for the moment last week. It rallied in response to strong retail sales, then took a 250 point nose dive at the end of the week over a poor jobs report. Problems with the subprime mortgage market and securitized debt of all types lurk in the background. The big question is what will the Fed do next Tuesday? An article in the New York Times over the weekend said a rate cut of 25 basis points is a sure thing. The only question is whether the Fed would cut fifty.    The New York Times has a much larger circulation than this blog and many times the number of reporters (I have only me), but I think they’re wrong on this one.  Mr. Bernanke is not going to cut rates to placate a bunch of wealthy Wall Street types who are crying because they’re no longer minting money. So I’m going to that the other side of the bet.   The Fed will not cut rates next week. The US economy is strong, the wo...
More About: Living , Moment

The Tail Wagging the Dog
2007-09-05 15:00:00
Which of your investments worried you most during the recent market correction?  If it was one of your smaller holdings, you’re not alone. But, we all have only so much time and so many brain cells to devote to investing. If you’re focusing yours on a tiny portion of your investments, the majority of your net worth is going unwatched.   Many investors I speak with are focused on only one or two of their investments or, worse, are fixated on the one they sold which has since gone up in price.  Have you ever taken a flyer? Bought a few shares of something on a tip? Stop and ask yourself: suppose this purchase doubles or triples, what impact will it have on your net worth? It will be insignificant. And, any change to your net worth will be dwarfed by the movement of your primary investments.   Let’s put some numbers to this. If you have a stock or mutual fund which is 1% of your total portfolio and ...
More About: Investing , Mutual Funds , Diversification , Tail , The D

Gut Check Time
2007-08-29 14:25:00
The recent events in the stock and bond markets drew everyone’s attention. No doubt you took a look at your investments and, perhaps, worried about one or two. Maybe, you made some changes to your portfolio. Let’s take a look at your experience and see if there are some lessons to be learned.   Did you lose sleep, literally or figuratively, over any of your investments?   This is the gut check measure of risk tolerance, not quantifiable, but accurate nonetheless. Investing is not an emotional decision, it takes hard work and discipline, but if you worry too much about an investment, it isn’t right for you. One of the hardest parts of investing is keeping your emotions out of it (i.e., taking a loss or selling your “favorite” mutual fund). Emotion will only cause you to buy at the market highs and sell at the lows. But, did your gut tell you to sell anything during the recent market correction? Rul...
More About: Time , Check , Mutual Funds

Speculate For Growth, Not For Income
2007-08-22 15:33:00
There’s an old adage in the brokerage community that you should speculate for growth, not for income. Speculation isn’t the right word, but the broker who coined it (pun intended) probably wasn’t an English major (most brokers aren’t). The point is that you should take risk with investments which you expect to increase in value, i.e., stocks, but not with investments made to generate current income, i.e., fixed income securities. This is an essential maxim if you are dependent on that income.    Greater income (return), always entails greater risk. It’s the way the world works. One rule of thumb is to compare your investment to others in the same class.   There’s a reason a money market fund has a higher yield than its peers – it’s taking more risk. The same is true for any bond fund. A second rule of thumb is to stick with quality.  Buy funds which invest in government...
More About: Investing , Income , Growth , Mutual Funds , Grow

The Fat Lady Has Sung
2007-08-20 15:16:00
Actually it was a dapper middle aged male with a neatly trimmed beard who spoke. When the Fed chief cut the discount rate Friday morning, the market breathed a sigh of relief.  The implication is that Fed will take additional action, if necessary.  The liquidity crisis will be contained. Earlier last week, the major averages retreated 10% from their July highs (and all-time highs for the DJIA and S&P 500), an “official” market correction.   The market may bump along for a while, September and October are typically the worst months of the year for the market (although this was not true in 2006). High volatility will be the norm and the market may well test the lows it reached last week, but there will not be another leg down. We should expect more bad news from hedge funds and other participants in the junk mortgage and securitization markets but the damage will be limited to those players and will not drag down the rest of the ma...
More About: Market , Lady , Mutual Funds

Too Close to Call
2007-08-13 13:55:00
It’s hard to believe, but the Dow, S&P and NASDAQ all closed up for the week. Friday was a roller coaster day in the markets and, as they gyrated up and down, it was too close to call as to whether the indices would finish the week plus or minus.    The Europeans are taking our credit problems more seriously than are we, witness the downward movements on their stock exchanges and the amount of liquidity the European Central Bank poured into the system. The fact that Europe is effected by our mortgage and securitization problems demonstrates the interconnectivity of world financial markets.   The Fed injected funds into the US financial system. (The Fed is acting responsibly, notwithstanding what Jim Cramer says. As much as I respect Jim, the Fed has no obligation to bail out hedge funds or attempt to eliminate – which it couldn’t do anyway – market corrections.) The Fed is essentially providing liquidity to the ...
More About: Market , Mutual Funds , Close , Call

Same Old, Same Old
2007-08-06 14:43:00
Last week was another down week for the stock market, attributed to problems in the subprime sector rippling through the debt market. The jobs report also was a disappointment. The Dow, S&P 500, and NASDAQ are down 5.8%, 7.7% and 7.7%, respectively, from their July peak (all-time highs for the Dow and S&P). These declines exceed the February – March correction and they should because they’re reflecting more serious problems (the Feb. – Mar. adjustment was a reaction to a pullback in the Chinese market).   What to expect this week?   More of the same. Subprime is finally getting the attention it deserves (even though the problem has been around for months). The market for securitizations is shaky (and all loans, not just subprime mortgages, are packaged and resold in securitized form). The big question is what will the Fed do when it meets on Tuesday? Answer: leave rates unchanged. This will be a ...
More About: Market , Mutual Funds , Same