Is Conventional Wisdom Always Wrong?

The short answer is: Only at market tops and bottoms. But of course, conventional bulls have a bad habit of staying bullish for several years after the market tops and conventional bears remain bearish for the first few years of a new bull market. Following are several aspects of conventional market wisdom that will be proven wrong as the current bear market continues to its final end.

What are some of the magic solutions being broadcast and televised to our unwary masses of investors? Let's start with balance and diversify. These magic words are being recommended to our long-suffering investors hundreds of times per day on CNBC, ROB TV and other channels. What do these words imply and what will they really accomplish? Then, let's look at "Buy and Hold - Myth or Truth?”

Balanced Portfolios

The word portfolio balancing had a single, readily understood meaning over most of the last century. It referred to the ratio of fixed income and equity securities in an institutional portfolio. Many large institutions, pension funds, endowment funds etc. traditionally held a bond/equity ratio of 60/40 or 70/30. These balanced portfolios would periodically be rebalanced to the desired ratio when the ratio varied from specified limits.

When mutual funds became popular, a number of them adopted the balanced strategy as a proven means of providing income, price stability and a modest amount of capital gains. A few well known funds have continued to provide the results explained in their literature. This is a fine performance and a credit to the fund management companies. They have set a good example of what a conservative balanced plan, consistently followed, can do.

But the fixed ratio, balanced funds managed by a state, provincial or corporate pension agency, or a college endowment fund were in many sad cases caught up in the recent stock market mania. Succumbing to the mass hysteria, many chose to increase the equity ratio to 80% or higher in search of gains in the stock market.  Now many of these funds have lost heavily in the bear market and will face severe criticism for their failure to act prudently.

Diversified Portfolios

A diversified portfolio can mean almost anything. It can be diversified with respect to asset classes, geography, industry, asset size etc. It could be stretched to cover a portfolio of mutual funds of similar characteristics but different managers. A portfolio could be diversified by using different stocks in the same industry or by using stocks in different industries. A bond portfolio can be diversified by using bonds of different maturities or corporate bonds. This is a complex subject best left to experts.

Since most mutual funds own several dozen to several hundred stocks they hold what is considered as a diversified portfolio. But other quite similar funds under other managers may produce quite different returns. Thus, large portfolios will choose to own several similar funds to provide diversification of management. The wide performance range in a group of funds of the same type is an argument against a blind type of diversification and an argument for using other criteria to gain better performance.

During the late bull market, the idea of owning all the stocks in a large index like the S&P500 came into favor. The arguments for such funds centered around lower taxes and lower management fees. However their guaranteed lower return in a general bear market may dampen the enthusiasm for index funds. We will reserve judgment until the end of a full bull and bear market cycle.

Using too much diversification could lead to mediocre results and possibly in an inability to achieve a superior level of performance. This leads us to the idea of using concentration rather than diversification to achieve optimum results.

Buying For The Long Term a.k.a. Buy & Hold

This philosophy has probably cost more investors more money than all others. Yes, it is true that the market has always gone up over the past two centuries but at a very slow rate, especially after correcting for inflation. But if one looks closely at what happened during each century we see bull and bear markets occurring at fairly regular intervals. There can be remarkable stories of individuals investing over forty years and amassing a small fortune. It can only happen if you begin at a market low and end at a market high. During the last century there were three very long periods when the Dow made essentially no change. It is unreasonable to assume that any one investor will be lucky enough to reach retirement age at a major market top. With the prevalent lack of market know how, how many 65 year olds exited the bull market in early 2000?

Newer Portfolio Ideas

Always eager to sell their wares, mutual funds have continued to invent or rediscover new ways to gain more customers. Mutual funds that concentrate in a single industry like energy, health, precious metals are known as sector funds. These have been available for a number of decades and require a cyclic allocation for best results. More recently, a number of fund companies have introduced so-called "Focus" funds containing as few as 15 or 20 stocks. These funds have had a mixed record with more failures than successes in recent years.

One trial balloon that has failed to catch on is that of a market-neutral fund that holds both long and short positions which are adjusted in an attempt to achieve a positive return. Unless the portfolio manager has a proven market timing tool, the fund will likely struggle to produce a positive return.

The Right Approach For Thinking Investors

Many years of experience in adjusting investors’ mutual fund holdings have convinced me to concentrate my efforts on two ideas (1) own asset classes expected to go up in bull markets and avoid asset classes expected to go down in bear markets (2) in bear markets, own investments that go up and avoid investments that go down.

Working in partnership with an experienced planner....................

Excelling in the study and understanding of the movement of bond markets Hans Merkelbach applies a similar expertise to the re-balancing between equity, bond, money market and specialty mutual funds and unlike asset-allocation it has everything to do with a risk-averse re-balancing strategy combined with a reasonable cost, based on a continuous study of the underlying fundamentals which move the financial markets. I do not act as a portfolio manager. My clients rely on me to make periodic judgment calls and only in that capacity do I work in partnership with my clients.

About Sales Commissions....................

The majority of mutual funds sold are either Front-Load or Rear-Load. More and more no load mutual funds are entering the fray and this trend is likely to continue going forward. It is imperative that you look for a dealer/seller of mutual funds who charges reasonable fees because excessive fees affect the overall performance of your mutual funds considerably.  Mutual funds are purchased on a minimal Front-End load leaving the investor in the position to freely move between fund company families without incurring redemption-fees. Please refer to “ What is required from you, the mutual fund investor.”

About asset-selection and risk-allocation........................

Risk allocation is the opposite of market timing. It uses T-Bill Funds or Money Market Funds as a temporary resting place for investment capital. Mutual fund allocation is usually changed gradually and over the length of an economic cycle by sector re-balancing your mutual fund portfolio. This is also called asset-allocation and/or diversification in the industry. Your sector weighting, may it be equities, bonds or money market funds, should always be subject to the conservation of capital and to the avoidance of being invested in the wrong type of sector during serious bear markets.

Most of my clients are in, or within six years of retirement. Riding a bear market down with 50% losses is not what they have in mind when they started their mutual fund investments. The likelihood of such losses that affect retirement style and comfort should be avoided at all cost.  So be critical, ask questions, do not pay exorbitant fees, in other words maximize down-side protection and minimize cost, after all it's your money. I will never sacrifice my objective of having a safety first profit oriented strategy and I will avoid at all times anything to do with a quick profit or the comfort of being part of a herd-mentality.

“BUY & HOLD” - a wise strategy? Only when invested in the asset most friendly to the underlying fundamentals....................

A Buy & Hold strategy is largely dependent on fundamental factors. There's always the belief that if you only chose equity or bond mutual funds or a blending thereof, your mutual fund portfolio won't get hit hard in a bear market. That belief is an historic illusion. “Buy & Hold” is a safe strategy when you are invested in the asset, which is friendly to the developing underlying fundamentals, be that Equities, Government Bonds or Cash.

Courtesy of http://www.investech.com Shown in the graph is the dramatic difference between a blind Buy & Hold strategy versus moving to temporary cash (Money market Funds or Fixed-Income Funds)  when the investment climate has turned against the investor. Since 1962, a $10,000 investment in the S&P 500 would have grown to $719,592 through Buy & Hold. In direct contrast, that same $10,000 could have returned 5 times more - $3,332,028 – by following a “safety first “ and “risk averse” strategy. This strategy is designed to keep you out-of-bear-markets when the monetary climate turns against the investor.

 

 

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About capital preservation.....................

Knowledge of the underlying fundamentals, which move the financial markets, helps the investor make informed mutual fund decisions. The correct answer to preserving capital and achieving above average returns is to employ a financially conservative, analytically prudent and risk-averse approach in looking after your mutual funds. If you are a do-it-yourself mutual fund investor or you rely on someone else's advice it pays to be critical to ensure good performance in both good and bad markets. To carry out a risk  averse strategy results in peace of mind and reduced risk. To reduce risk one has to move to safety when risk becomes greatest in a specific asset-class, thereby putting your retirement moneys out of harms way.

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MY CLIENT COMMITMENT

I attract new clients by serving present clients exceptionally well.

Exceptional service demands personal attention as well as genuine concern for the financial well being of my clients. And so I run my service according to one fundamental principle: to help protect my clients’ capital as I safeguard its purchasing power. It is a simple principle upon which I base my brand of personal financial conservatism. Vigorously pursued it has created a service unparalleled in mutual fund investing. Based on a risk-adjusted formula, it is security as well as return that I must ensure each day, and in the process, to deliver a unique quality of service.

A special word of thanks to Mr. Joseph Killoran, for the inspiration he gave me to go beyond the ordinary and offer mutual fund investors a unique service based on the principles and disclosures set forth in his Fund Transaction Checklist, an ethical and moral contract between the mutual fund investor and seller. http://www.investorism.com

investorism, a new discipline that is far more critical to our financial well-being than our Government of Canada, Industry Canada Ministry defines, communicates and polices consumerism.  Investorism dates back to my October 1994 pre-Enron "financial euthanasia" vision, a vision that foretold that many Canadians would face the consequences of "Financial Euthanasia" years before they would ever face "medical euthanasia" decisions.  The defining educating thesises behind "investorism," include:

• the need to teach "financial literacy" as a core curriculum subject beginning in our public schools
• with mankind having spent gazillions of dollars to extend our life expectancies ( vaccinations, needles, drugs, health education and prevention practices, diagnostic equipment, technology, medicine . . . . ; living standards: water chlorination, sewage disposal and treatment, seat belts, food packaging standards, shelf life . . . . .; safety items: pre-flight checklists, seat belts, swimming lessons, life jackets,  . .. . . . . etc.), mankind has failed miserably to teach:
• better / proper consumption habits: needs versus wants,
• proper use of credit cards: VISA & MasterCard can be plastique explosives!
• proper savings practices: the need to save in order to fund our longer life expectancies,
• the need to then learn to invest our savings safely and prudently:  too little risk can have as significant consequences as too much risk
•  the need to implement better Just-in-Time point-of-transaction transparency processes that actually educate consumer/investors while also facilitating decision making, that validate independent advice, that enhance safety and protection: systems and processes that level the playing field - that make the process fairer for an uneducated in "financial literacy" consumer/investor.
• when we have an educated consumer/investor, our financial marketplaces will move to better products at lower costs ( helps the creation of wealth that investors need to fund their longer life expectancies ) with the addition of other volatility reducing ingredients that raise the bars of trust, respect, integrity, confidence, safety, fairer play, that also heighten and improve business values, morals, and ethics practices

My investorism J-i-T point-of-transaction educating one-pagers: 

1. my initial mutual fund point-of-transaction Checklist, http://www.investorism.com/disclosure.pdf 
2. my Redemption / Switch Disclosure Document, http://www.investorism.com/rsdd0210.pdf  and
3. my Advisor Profile one pager http://www.investorism.com/profile.pdf 
    

Mutual Fund Education Series
(PDF Files)

(1)   BUYING MUTUAL FUNDS

(2)   PROFESSIONAL FUND MANAGEMENT vs. “THE INDEX”

(3)    BETA, Risk and Mutual Funds

(4)   ETF’s – Another kind of Mutual Fund

(5) “Buy and Hold?

(6) THE CARDINAL RULES OF INVESTING

(7) THE DEFERRED SALES CHARGE – THE GOLDEN HANDCUFF?”

 

What is required from you, the mutual fund investor!

·        A minimum of $ 100,000 in cash or transferred-in mutual funds: RRSPs and RRIFs also eligible.

·        There is no commission charged on transferred-in mutual funds.

·        Once your account has been established there are no switch fees.

·        There is no commission fornew mutual fund purchases; Open Account and RRSP contributions. You will not purchase Deferred Sales Charge loaded mutual funds. 

·        That you pay a Trustee Fee for RRSPs and RRIFs.

You don't have to stay within one family of mutual funds!

Since there is no fear of being charged for any unpaid redemption fees you are free to transfer your mutual funds at no cost since no redemption fee will be deducted from the net asset value of your mutual funds. In other words you are free to go where the better opportunities are and it is especially the undervalued sectors or risk-averse sectors, which are in harmony with the underlying fundamentals that you should be investing in. Simply put, you are free to make mutual fund changes without incurring redemption charges.

You will be part of an important decision-making process!

At no time are changes in your mutual fund portfolio made without your approval and involvement. At portfolio review intervals, recommendations  to change weightings, changes in asset classes or specialty sectors are then decided upon.

Confidential mutual fund portfolio review.

A complimentary review and analysis is advisable before you decide to invest or transfer-in your current mutual funds. To qualify for a complimentary mutual fund portfolio review you must have a minimum of $100,000 in transferred in eligible mutual funds (RRSPs and RRIFs also eligible).

Summing it all up!

At last, a reasonable commission and absolutely no redemption fees or switching fees except trailer fees which the mutual fund company pays your mutual fund advisor in any event.

How to start the ball rolling!

I invite you to contact me for a no-frills, no-obligation discussion of your current mutual fund portfolio or planned mutual fund investments. Please go to Request for Contact Form and How To Contact Me.