Please check out our newly revamped and updated Our Favorite Funds section. In it you'll find a complete list of our single favorite fund in each of 24 fund categories, as well as our favorite exchange traded fund, low minimum, and no transaction fee options for each category.
Give it a look by clicking here, and if you have a minute let us know what you think.
CNBC reporter Rick Santelli recently had his 15 minutes of fame when he went on a rant about having to pay for the mistakes of 'losers' through a recently announced government mortgage payment subsidy program. He then made the very big mistake of standing up the Daily Show with Jon Stewart. Payback was delivered in the form of a mini-documentary of bad CNBC advice and commentary spanning the Dow's slide from over 14,000 to under 7,000.
Surprisingly the Daily Show doesn't note that the parent company of CNBC, GE, has received government support in the form of over a hundred billion in taxpayer backing of GE debt, without which GE could have failed during the commercial paper panic of 2008.
As the Great Real Estate Bubble deflates, those without sin should cast the first stone.
While Buffett warns against the use of leverage, Wall Street and the banking system decided that leveraging up into high return, low risk assets (like real estate...) was a great idea.
Mutual funds that use leverage - primarily closed end funds but also newfangled 130/30 funds, had a crummy 2008.
In recent years, more mutual funds have used borrowed money to juice returns and lure investors. Now, they are discovering the downside of leverage, and some are cutting back.
Early last year, Wall Street was heavily promoting several new types of funds that rely on borrowing money. These include so-called 130/30 funds that aim to amplify market returns by betting against some stocks, as well as "leveraged index" funds, which promise to double the return of a market index or double its inverse.
At the same time, closed-end funds, many of which have used leverage for decades, were growing rapidly until 2007.
While borrowing money can improve returns in good times, it also widens losses in bad times, and that is what happened in 2008. Some of these funds ended the year with even greater losses than the market as a whole. For instance, of the 15 mutual funds that apply the 130/30 strategy for U.S. stocks, only a third beat the Standard & Poor's 500-stock index in 2008, according to Morningstar Inc. Some of the laggards fell behind the index by five percentage points.
We remain amused by the mutual fund industrial complex's ability to generate new ideas to sell shortly before the market takes a long trip south.
It's Not an Honor Just to be Nominated.
Not exactly a rare breed even in the best of times, the Fund Turkey multiplies exponentially when the market turns south.
A bear market is a high-powered headlight bar across the top of your fund research pickup truck, shining a spotlight on bull market excess. Tis the season to hunt Fund Turkeys (squawking all the way about investing abroad or in commodities), and thin this breed.
So without further ado, it's high time for our 8th annual Fund Turkey Awards!
The "Audacity of Hope" Award
Winner: Bear Stearns
At the top of the list of suckers for the real estate bubble is was Bear Stearns, the century-old Wall Street investment bank that collapsed well before the other leveraged "Masters of the Universe” suffered similar fates. What started innocuously enough with leveraged mortgage debt hedge funds didn’t end until the entire firm lay in ruins.
But failure's no reason to give up! You have to give Bear props for launching the first actively managed ETF, Bear Stearns Current Yield ETF (YYY). So what did this innovative new fund invest in? Mortgage securities. Naturally.
Bear's final hurrah didn’t last long. In September , the fund's Board of Trustees unanimously approved its liquidation "in the best interests of the Fund and its shareholders.” ...read the rest of this article»
A blog at the Wall Street Journal notes that investors tend to think of risk as something that falls as prices rise:
If the history of the financial markets and the psychology of investing have anything to teach us, it is that present emotion and future returns are inversely correlated. Today’s feelings of pain and fear are the building blocks for tomorrow’s wealth. Eras of good feeling are terrible times to buy stocks.
The corollary is that perceived risk and actual risk tend to be polar opposites. When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14000, and it feels risky as hell now that it is clinging to the edge of 8000 with its fingernails. That’s perceived risk: low when prices go up, and high when prices go down."
Investors often could do better doing the opposite of what they think will happen.
Stacey Asks:
Why did Evergreen Precious Metals A (EKWAX) tank so badly? Is there a bright side?"
After Monday’s drop, Evergreen Precious Metals had fallen about 68% since its peak in March 2008. That's more than the S&P 500, Dow, Nasdaq, MSCI EAFE Index, junk bond market, emerging market bond market, classic car market, housing market, and subprime loan market. Okay, maybe not more than subprime, but you get the point.
What's most surprising, and probably the root of your question, is that the fund has fallen far further than gold itself, that shiny metal that comprises the core of the precious metals funds. If you compare this fund to the Gold ETF (see streetTRACKS Gold Trust ETF [GLD]), you won't be impressed with your fund's performance. But if you compare it to other gold funds, you might feel a bit better. Popular gold funds like Vanguard Precious Metals And Mining (VGPMX), Fidelity Select Gold (FSAGX), Oppenheimer Gold & Special Miners (OPGSX), Franklin Gold And Precious Metals (FKRCX), and USAA Mutual Funds Precious Metals (USAGX) are in equally rough (or worse) shape.
As it turns out, gold-related companies are no more magical than any other commodity-related companies you'd find in a natural resource fund. We've just witnessed one of the fastest drops in broad commodity prices in history. The fact that the nosedive followed the launch of dozens of commodity funds inspired by investor fascination with 'hard assets' should come as no surprise. ...read the rest of this article»
With the Dow falling a few hundred points every single stinking day, you may not have noticed the carnage in almost all bond categories other than U.S. Government bonds. The nightly news doesn't show bond prices. Our guess is that this is what is really keeping some investors up at night.
Sure, the 40%+ drop from the peak in major market indexes is stunning, as is the performance of so many 'value' funds that seem to be falling faster than 'growth' funds did in the last bear market. Case in point Vanguard Capital Value Fund (VCVLX) is now down over 50% since the begining of 2008 after a manager change led to increased stakes in Russian stocks - the stock market than now routinely is shut down from panic selling - and energy picks, snapped up at pre-commodity bubble crash prices of course. Wellington Management Company was founded in 1928 so would think they would have learned their lesson about crashes...
But stocks are stocks, and investors almost have to expect 20%, 30%, even 40% drops every few decades - given the long-term upside and potential for one-year double-digit gains, it would be foolish to expect only big upside and no downside.
Bonds, on the other hand, are for adding diversification, stability, and regular income. You'll never get rich, but you wont lose much either. That is, until the great debt panic of 2008, which in its most recent form has hit safe debt categories like commercial paper (short term corporate borrowing), investment grade bonds, convertible bonds, and perhaps most stunningly - municipal bonds.
Municipal bonds are bonds issued by state and local governments. Some bonds not backed by the full taxing authority of the state are higher risk, but between the power to tax and the insurance that is frequently behind muni bonds, actually losing money by default is a fairly rare event. Muni bonds are typically sold to wealthier risk-averse investors who want steady, tax exempt income.
This is why the 10%-40% hits in muni bond funds in recent weeks is so startling. Over the last thirty days or so a conservative unleveaged fund like Vanguard Insured Long-Term Tax-Exempt Fund Investor Shares (VILPX), which "Invests primarily in high-quality municipal securities." and "Holds bonds covered by insurance guaranteeing the timely payment of principal and interest." is down 10%. Take a gander at more aggressive leveraged closed end muni bond funds - popular with brokers who sell them at IPO - and you'll find dozens in which the underlying holdings of the fund are down 20%-30% - which when you add in the widening discount to fund price means investors are seeing hits of around 50%. Recently some of these funds are moving up and down (mostly down) 10%-20% per day, much like leveraged junk bond funds have done of late. California muni bonds are acting like emerging market bonds.
It's bad enough when Internet fund drops like a rock but when 'safe' assets like your house and muni bonds start to act like Pets.com stock,well you can see why investors have become a little unnerved of late.
The stock market is having its worst stretch since the 1930s, but as bad as it is, foreign markets across the board are faring much worse.
Those who have viewed MAXfunds' fund data pages or Our Favorite Funds lists from time to time over the last year may have wondered why most emerging market funds have negative forecasts for future performance and lousy metrics (or why we sold our emerging market fund picks from our Powerfund Portfolios in recent years).
Long time MAXfunds.com readers will remember we had similar negative ratings on most tech funds in 2000. The rationale then and today was the same.
Our fund metrics are designed to help fund investors avoid funds that are likely to fall - the very funds attracting the most money after posting big returns. Most fund ratings and rankings only direct attention to the overvalued - they encourage performance chasing.
The reason we have used this anti-performance chasing methodology is to help you avoid the inevitable result of buying into popular funds and categories: below-market returns.
An article that appeared this week in the Wall Street Journal describes the carnage experienced by the throngs of fund investors who flocked into international markets in recent years. The only difference between this after-the-fact article and the ones published in 2002 is then it was tech and growth funds that were falling faster than the S&P 500 - the very funds that brought in the most money before the drop.
The average diversified foreign stock fund, which invests primarily in developed markets, is down 33% since the start of the year through Friday, versus a 25.5% decline for the average diversified U.S. stock fund, according to Morningstar Inc.
It's even worse in less-established foreign markets. The average emerging-markets stock fund, which includes funds dedicated to China, India and Latin America, is down 42.5% so far this year.
This is a sharp reversal from the heady gains of recent years. In 2007, the average emerging-market fund gained 40%, while the average foreign developed-market fund gained 12%.
On Monday, some European markets had their worst decline in 20 years. Britain's FTSE 100 index fell 8%, while France's benchmark CAC-40 index fell 9%, the largest one-day declines for both markets at least since 1987. Also on Monday, stock trading was halted repeatedly in Russia and in Brazil, where shares registered declines of 19% and 5.4%, respectively. Asian markets fell as much as 6%, but they have been hit worse than European markets since the start of the year.
Mutual-fund investors have piled into foreign markets in recent years partly to diversify their portfolios. Some $463 billion in net contributions poured into these funds from 2003 to 2007, boosting assets to $1.48 trillion at the end of 2007, according to Morningstar."
The more things change, the more they stay the same...
Remember last week when the Dow fell 777 because politicians didn't pass the Banker Bailout Bill (BBB)? Well earlier today the Dow was down over 800. Worse, this was 1,300 from the market peak last Friday, around the time the bill passed.
My government spent almost one trillion dollars and all I got was this crummy market! For those looking for a bright side, consider many emerging market funds are down 50% from the peaks; heck Russia fell around 20% in a day and is now down 65% from highs. And Russia didn't even have a housing bubble! They did have a commodity bubble but we'll save that tale for another day.
This makes one wonder, what would have happened if no rescue package was passed? The non-U.S. government bond market - the area the bailout is targeting - is not fairing much better.
The trouble is panic has set in. Not just with investors, but consumers. For the first year or so of the unwinding of the Great Real Estate bubble, experts were sure it was somehow going to be contained - that trillions of instant wealth could just disappear with nobody noticing (except the banks then lent money against the phantom gains). Well if you've been to a car dealership lately, people have started to notice.
While we don't think the Dow under 10,000 is such a bad place to be compared to government bonds, CDs, or real estate, if this downward spiral continues HGTV's "My House Is Worth What?" will be renamed "My House Is Worth What!"
Congress Killed the bailout. Everybody is mad at somebody. The bailout is too big. Too small. Doesn't spread the wealth. Will hurt taxpayers. Will lead to more bad behavior. This list goes on. In this upside down world, Republicans want big government solutions to market problems while Democrats want to redistribute wealth to bankers. Everybody has a bone to pick on the bailout yet nobody can explain exactly how $700 billion stops the market madness.
What did the stock market think about the delay in the $700 billion fix? Dow down -777. Yesterday, even lucky numbers meant bad luck.
With big banks dropping like flies (A.T.B.T.F. almost to big to fail...) and every kind of debt with more default risk than U.S. government bonds going through bouts of panic selling (even munis! ) its time to reflect back and remember one thing: this is all the result of the Great Real Estate Bubble.
While there is certainly much blame to go around, the biggest villain was a simple widespread belief that homes were a perpetual upward motion machine.
Like everybody, we have our own ideas on how to 'save' humanity from our greatest bubble yet (bonus feature - it doesn't require creating another bigger bubble somewhere else). But who cares what we think about the bubble anymore... All you need to know is there are only three parties that can take the fall as trillions in phantom real estate wealth evaporates:
1) Home Owners
2) Lenders (this includes investors in mortgage debt, not just jet-set bank execs)
3) Taxpayers
Government polices and bailouts can shift the burden between the big three, but all will take a hit. Without magically re-inflating the housing bubble, there is no way all groups can come out unscathed. The best way to start crafting a bailout package is determine how you want to spread the multi-trillion dollar burden.
And remember when you go around finger pointing, those that live in glass houses shouldn't have taken out a pick-a-payment home equity loan to renovate their kitchen with stainless steel appliances and a granite counter top because someone on HGTV said repeatedly it adds value beyond the cost of the renovation...
"The MAXfunds approach stands in stark contrast to other fund-ranking outfits. The rating system also has a strong contrarian streak. As everyone who's ever read a mutual-fund advertisement knows, 'Past performance does not guarantee future results.' Why then do most fund-ranking outfits rely so heavily on past performance in picking favorites?"
Follow the money, then go the other way. Expertly assembled mutual fund-focused model portfolios for every risk level - now 100% free!
