August 24th was probably the worst day in the history of exchange-traded funds. While the 1,000 point plus loss in the Dow early on 8/24 gets all the headlines, some large ETFs took a dive, albeit a brief one, that would be the equivalent of a 7,000 plus point loss in the Dow. Yikes. 


Investors have been worried about rising interest rates for years. That fear has created a bond market fueled by funds designed to protect investors from the any-day-now-you-just-wait interest rate disaster. Like 1950s-era bomb shelters, these funds are costly protection you don’t need. Ninety-eight percent of all bond money is invested in funds with marginal interest rate risk. Interest rate risk is a phantom menace.


Last month our Aggressive Powerfund Portfolio, which debuted on March 31st, 2002, moved past the 300% since-inception return mark (recent weakness in bonds and stocks currently put us just below that level).  In the warm glow of the rearview mirror, that 300% (or just over 11% annualized) seems pretty grand. But it’s important to look at what actually happened to generate that return and consider how repeatable it is. “Past performance is no indication of future results” is as true for us as anyone else.


The primary reason for our trade on 3/13 and 3/16 was to cut back on our oil short, DB Crude Oil Double Short ETN (DTO), which has performed very well in the Powerfund Portfolios, even without a collapse in either the global economy or the stock markets. We wanted to get out of utilities and floating rate junk bonds and also to use the recent major slide in the euro to get back into foreign bonds after a long hiatus. We rebalanced the portfolios a little, too. 


We’ve learned something in 2014. Commodity investing is dead. Long live the information economy. Oh, real assets, we hardly knew ye!


Using past performance to pick your investments doesn’t usually work. You’ve heard this all before. It’s not a guarantee of future returns, yada, yada, yada…But what's a poor investor who still believes in the virtues of good old-fashioned stock and bond picking supposed to do? Choose funds with bad returns?


Although this latest slide, which started about a month ago in mid-September, isn’t that big of a deal in percentage terms for the U.S. market, both the speed of the drop as well as bigger drops in hot growth stocks are scaring investors lulled into a false sense of security by a market with few down interruptions in recent years.


For some reason, investor fear of rising interest rates gets more press than the brewing tech bubble. Maybe it’s the risk/reward comparison that scares investors. Sure, it won’t be good for Alibaba (BABA) investors coming in at a quarter trillion dollar market cap if earnings growth stagnates,  or Netflix (NFLX) investors buying at ~100 P/E ratios, but those companies could have more than the 3-4% annual gain longer-term investment-grade bond buyers can look forward to if things go well. 


As the market continues to erase every pullback in short order, investors are focusing less on downside risk and more on  upside potential. Controlling losses is no longer a priority.  As the markets heat up, investors want a piece of the action. As contrarians, that isn’t our approach, and it shouldn’t be yours, either. Ideally, concern for downside should rise along with the market, just as ensuring you’re positioned for the rebound should be your objective during a long bear market. 


Welcome back, dear readers. As temperatures (and the stock market) continue to rise, it’s time for Part II of our two-part summer beach read about potential causes of the next market drop.


It's not clear where the next significant slide will come from. We don’t have a broad tech and growth stock bubble like we had in 2000. We don’t have a real estate bubble propping up the economy. Not that you need a reason for the stock market to slide. There's still no consensus as to what caused the crash of 1987, and experts differ on the reasons for the 1929 crash as well as the depth of the economic problems following the slide.


While it's true that stocks are the best-performing investment in the long run, they're also one of the most volatile, which can trigger poor returns far worse than the other lesser  asset classes, despite the fact that they often have stability going for them.


 Flash Boys isn't about a devastating Madoff-esque Ponzi scheme. It's more about how Wall Street as an industry can maim a portfolio with a thousand cuts, the razor of focus this time being sophisticated front running computer schemes.


After a largely uninterrupted five-year run-up in stocks that began in early 2009, optimism is high, but so are doubts over the sustainability of good times for stocks.


Some part of us sort of root for a pullback. Here are some reasons nearly any investor (not just Bobby McFerrin) should stop worrying and even be happy about a drop in stocks.


This will be a risky five-year stretch, with 20% drops possible at the first sign of any economic hiccup, foreign or domestic. Without bubble-grade stock valuations or underlying large-scale economic problems like real estate speculation, 50%+ stock drops are less likely than they were during past peaks, yet always possible.


After years of separation, investors have finally rekindled their love affair with stocks. That on-again, off-again romance is definitely back on again, with billions going back into stock funds each month. Investors' infatuation with bond funds is also ending. Nearly $100 billion have come out of bond funds in 2013. They're just not that enticing anymore. Does this mean we should expect trouble down the road for the stock market, and if so, what sort?


As the stock market continues to rise, we hear experts claiming stocks are not that expensive compared to bonds. They cite modest P/E ratios and record earnings. While the P/E ratio of the market (looking at real earnings, not future expected earnings) is far from a historical bargain, it has been pricier in the past. 


The economy and markets are heavily influenced by purely psychological factors. People spend or invest based on fear, optimism, and expectations for the future. Consumers and investors make decisions based on tangible factors like wage growth and tax rate changes, but they're also surprisingly motivated by fluctuating optimism. It's entirely possible that most booms and busts are largely caused by swinging collective expectations.


We run a huge mega-database each month to calculate things like our MAXratings and to identify the most attractive (generally less popular) investment areas. In addition to our regular calculations, we also look at composite performance data. Each time we  evaluate the thousands of open-end funds vs. hundreds of ETFs,  the average mutual fund beats the average ETF. The ETFs are cheaper, and most have less turnover. Why is this?


Stocks have been going great guns since we hit the bottom of the financial meltdown in March 2009. We generally try to increase our stock allocation on the way down and cut back on stocks as they climb and investors grow more optimistic.


Our own relatively small foreign stock and cash allocations kept our portfolios more or less in line with a blend of U.S. stock and bonds. Our sharp underperformers (longer-term bonds and foreign markets) were balanced by good gains in financials, Japanese stocks, and healthcare. Still, it was no quarter to brag about. 


Predictions about rates having nowhere to go but up might have looked equally correct half a dozen times in recent years – yet been wrong.


With the market maintaining a perpetual upward trajectory in 2013, it could be time to revisit our theories about crashes and market peaks.


I reckon we’ve been talking about this here gold bubble in them thar hills for quite some time. Thankfully, the market gods have finally deigned to demonstrate exactly why we shouldn't be worshiping this particular golden calf. As of this writing, gold is down 27% from the highs it reached in September 2011. It fell 8% on Monday alone.


Many factors could trigger another major slide in the next few years, which is why stocks are intrinsically riskier than most bonds and cash. Yet it's possible to estimate an expected total return over, say, the next 10 years.


Someone once said that the only perfect hedge is in a Japanese garden. Here are a few typical strategies for minimizing downside (and upside…) in a portfolio, with some brief notes on the imperfections of each, especially in light of an ever-shifting landscape.


Although the European economy appears to be on the mend, with  some of the biggest financial misfit euro-area countries now able to borrow again, U.S. hijinks should continue for much of 2013, since many of the decisions that need to be made about the debt ceiling and spending cuts were largely kicked down the road for later theatre. Are you not entertained?


The so-called fiscal cliff is just a couple of weeks away, and while the fiscal cliff is certainly real, the ultimate size of the drop-off is unknown. There are many complex financial happenings at the end of 2012. Some have to do with estate taxes, some with ordinary income, and some with investment income. We can’t speak to all of the strategies available to those with different financial issues; moreover, non-investment tax issues would require the advice of estate attorneys and accountants. That doesn't mean, however, that everyone needs to seek such professionals or make any changes.


The party that should win is the Party Pooper Party, the one that gives voters a reality check – not nearly as fun as hocus-pocus economics. The Party Pooper Party never wins elections, though, because voters want to believe in magic. 


In celebration of the 10th year of Powerfund Portfolios, we're introducing a new  “Stats” page for both the Conservative and the Aggressive Portfolios. Here’s a quick tour.


In early 2002, we launched the model portfolios as a way to apply our MAXfunds rating system to an actual portfolio. Our goal was to offer portfolios with varying levels of risk (at the time, we had five core portfolios and two special-purpose portfolios) for different types of investors, including those with only a few thousand dollars to invest.  Now that the Powerfund Portfolios are in their tenth year (we created them in March 2002), we think it's a good time to take a look back at our long-term performance. 


Baby Boomers are following the age-old advice to shift from stocks to bonds as they grow older, despite the fact that this general recommendation might not apply in a world in which bonds yield less than stocks. But two 50%+ haircuts in the stock market since 2000 (with a "flash crash" thrown in for good measure) certainly aren't inspiring confidence in the stock market. Fear of another global catastrophe is keeping some money in seemingly low-risk places, but that doesn’t explain the shift within stock funds.


We’ve noted the hard times facing lower-risk tolerance investors – times that just got a little bit harder now that the 10-year Treasury bond yield has sunk back below 1.50%. Today, any funds with low interest rate risk (the risk of losing money if rates go up) and low default risk (the risk of borrowers not paying you back) is yielding less than 2%, often much less. Between retiring baby boomers and disappointment in a market that seems to slide 50% every few years, there are more lower-risk investors now than ever. But what about the poor multi-trillion dollar mutual fund industrial complex?


There 's good deal of concern in the markets that Europe's slow collapse will turn into something a little more 2008-ish. Remember 2008? The year Lehman, along with most of the financial services industrial complex, imploded? At least until governments near and far propped up the poor pinstriped saps and halted the panic. Free markets until markets free fall. The worry this time around centers on the governments themselves – governments that have increased spending to support weakening  economies while simultaneously moving the debts of a global real estate bubble to their own tattered balance sheet The buck has to stop somewhere. 


The popular term from about a half-decade ago was "decouple" — a scenario in which the global economy and stock market would lose the weight of the United States and no longer be dependent on U.S. demand to spur growth. This would lead to wild riches for those smart enough to focus abroad. This strategy, of course, is reminiscent of another popular investment concept, the “New Economy” versus the “Old Economy," because in 1999, tech stocks were leaving value stocks in the dust, and the smart move was to own a bunch of tech and growth funds.


It’s tax time, everyone’s least favorite time of year. Even those receiving refunds are pretty grumpy about the whole endeavor. But since the average tax rate Americans pay  will be one of the lowest in the last fifty-plus years, we should be celebrating.


Wall Street has a way of swinging from irrational fear to exuberance based on marginal changes in the underlying economy. With the news of the Dow back to its pre-Lehman high (but still off its all-time highs) and the Nasdaq back above 3,000 (but well below 5,000), you wonder if the only money to be made will be from trading on the exuberance and fear swings.


The biggest long-term problem facing investors right now isn't U.S. debt, or even European debt. It’s the likely near-indefinite future of very low returns on the lowest risk investments: CDs, money market funds, Treasury bills and notes, savings bonds, and even shorter-term corporate and municipal bonds. Any assets with a maximum downside of 5% or less probably have a likely upside of less than 2% per year for the foreseeable future. 


The year 2011 delivered plenty of volatility and little reward for stock investors. Equity returns were largely inversely related to risk – the smaller in size or more foreign the stock, the worse it performed. It was the same story all year; Europe teetered on the edge of a debt collapse while the U.S. economy teetered on the edge of recession.


Gold is set to deliver an astonishing 11th straight calendar year gain in 2011, a dramatic reversal of an equally astonishing 20-year slide that began in 1980 when the gold bubble collapsed. For 13 of the calendar years between 1981 and 2000, gold was a loser, in contrast to the S&P 500, which rose during 17 of those same 20 years. This stark comparison doesn’t do justice to the real money implications of sharply diverting ways. A thousand dollars invested into the Vanguard 500 Index Fund at the end of 1980 (even without 1980's 30%+ gain) grew to $17,524 by the end of 2000. The same investment in gold crumbled to $465.


As of November 14th, the S&P 500 is down a fraction, but up about 1% if you include dividends. In other words, despite the U.S. debt ceiling battles, euro debt chaos, and slow economic growth blues, investors are still beating money market funds and CDs. Granted, CDs don’t fall nearly 20% in a few weeks, look like they're going to slide another 50%, and then  recover. Such is the new market: low returns, sky-high volatility.


After this long plateau, inflation fears abound, oil prices remain uncomfortably high after skyrocketing a few years before. A global superpower is stuck in a war in Afghanistan, and Iraq is a war zone putting global oil supplies at risk. We have no idea where economic growth will come from, or when it will kick in. The government is a mess. Tax and regulatory uncertainty has business leaders scratching their heads. The unemployment rate, no longer stable at around 5%, seems to be heading toward 10%, and investing in precious metals or the far east appears to be the only way to make any money.


We’ve made trades our two model portfolios on September 20th to reflect 1) the market slide this year, and 2) increasing distaste for stock funds by investors, who are usually wrong.


If you believe  the brilliant minds at Standard & Poor’s, the U.S. must be mere months from collapse. After all, this is the same agency that continued to confer "Triple A" status on Enron debt until just a few months before its downfall. Standard & Poor's also waited too long to downgrade highly-rated debt created by Wall Street that contained sliced and diced home equity loan super tranches on bubble-inflated Vegas and Miami properties. We continue to believe U.S. government debt is safer from actual default risk than any debt in the world –though our debt probably is ever-so-slightly more at risk of a temporary default as politicians seem to think choosing default is a legitimate strategy.


There is no risk of a debt default currently priced into the market. Ten-year government bonds yield just under 3% today. No one wants to lend their money at 3% to a questionable borrower. That doesn’t mean a panic can’t start, perhaps from a debt downgrade or a run away from government debt, baseless or not. What people would do with the trillions of dollars they have in government debt is anybody’s guess. It can’t all go into the thin gold market. CDs are backed by the government.


The market’s recent weakness is causing a lot of anxiety. Since the last S&P 500 peak on April 29th, the actual decline has been a relatively mild 7.2% (as of June 15th). Yet the consistency of the slide is generating a lot of "worst decline since X" and "market down six weeks in a row" stories, stories that make investors nervous. Now we’re seeing people pull money from stock mutual funds a few months after big inflows.


Generally, stock funds launch following long runs up in stocks, when the appetite for stock investing is high. In particular, these launches tend to occur in the hottest of the already hot market. That's why so many Japanese, Asian, and emerging market funds launched in the early 1990s (to kick off the U.S. and other fully emerged stock  market decade with emerging markets lagging), small cap funds a few years after that (right before larger cap led the market), larger cap growth and tech funds in the late 1990s (before the 2000 crash), "dividend" and yield-focused funds around the mid 2000s (before high dividend banks collapsed), emerging market funds yet again in recent years, and commodity funds.


When bubbles mature, investors begin considering even more speculative areas with supposedly more upside, believing "all the money has been made" in the things that have already taken off. This second wave takes what was learned in the bubble, and applies it to an investment with questionable upside, often jolting the price even faster and higher than the original bubble.


Just when you thought you had your hands full with the current crop of investing fears – muni bond defaults, inflation, double-dip recessions, rising interest rates, the falling dollar, political unrest in the Middle East, rising oil prices, etc. – a new one appears: natural disasters. As we said in our article last month, Wall Street doesn’t see the real dangers coming…and generally doesn’t price in the unknowable risks of investing.


Although getting between you and your investments continues to deliver spoils in the tens of billions a year to the middle men, from the lowliest broker/salesman to the highest-flying billion(s)-dollar-a-year-plus salaried hedge fund manager, the only thing shrinking is the actual return from owning stocks and bonds, particularly if you follow many of the "experts'" wisdom and guidance.


The latest debt scare making the rounds: Fear of widespread municipal bond defaults. We’ve all heard again and again the stories of state-government financial problems, so when a well-known doom-and-gloom strategist appears on TV warning about major problems in the municipal debt markets, investors take note and by taking note we mean they sell their municipal bonds.


You know it’s bad when the fund companies warn you about dismal future returns in the bond market. Yet there it is – splashed on the home page of Vanguard’s personal investors site – "Vanguard’s Investment Chief Cautions Bond Investors” – a road sign that says “RISK AHEAD.”


The mutual fund flow data we study shows $30 billion potentially exiting U.S. stock funds in 2010 – in addition to outflows in 2007, 2008, and 2009. What makes this 2010 flow information surprising, is that it happened in a year in which stocks have not dropped significantly – unlike previous years. 


The stock and bond market have been strong lately, boosting returns of the funds in both Powerfund portfolios. If bonds were sinking and rates were climbing, we’d likely be shifting money from stocks to bonds at this time. In most cases, stocks, even at these levels, are still a better deal than bonds (although stocks remain the riskier asset class, bond bubble or no bond bubble).


On June 30th, we made a series of trades in the Powerfund Portfolios. These trades were a bit different than the ones we've made since we launched our model portfolios on April 1, 2002. We bought these funds with real money. There are real benefits to using real money to build and follow our portfolios. In order to understand the differences, we need to review how we handled things for the first eight years.


Big money has been moving into bond funds over the last year or so. We saw a similar situation in the late 1990s, with massive flows into stock funds. Broadly speaking, this trend might lead us to favor stocks over bonds for the next few years, since we generally avoid whatever attracts fund investors. But there's a little more to this money flow than meets the eye.


June marks the 100th month we’ve published the Powerfund Portfolios newsletter, and to mark the occasion, we’re making some executive changes to our model portfolios. We’ll be reducing the number of model portfolios and (eventually) moving to daily performance updates.


We  want to be in the fund categories other investors avoid. During the market comeback's last hurrah, investors began piling back into junk bonds and foreign, small cap, natural resources, and commodities funds. We prefer investing in these areas when prices are down as investors scramble for safety. Today's investors are worried about inflation, which usually ensures inflation won't be a big problem.


While the ten-year return is still slightly negative, over the last 12-months the S&P 500 was up just under 39%. The 70% run-up from the lows of early March are fueling optimism. Just not around here. We’re planning on slimming down our stock stakes soon. As dyed in the wool contrarians, we prefer when stocks seem to have nowhere to go but down.


Are investors who buy stocks now April fools? Stocks are definitely more expensive than they were during the financial panic, but they're cheaper than they were right before it started, back when the Dow tipped the scales at 14,000.


Inexplicably, investors are more afraid of runaway inflation than depressions or panics, although both have occurred more frequently in our nation’s economic history. Even during this last face-off with possible depression, most investors were more concerned about inflation than deflation, perhaps the main symptom of an economic depression


January was the first real down month since the market recovery began on March 9, 2009. In January, an investment in the Vanguard 500 Index Fund (VFINX), which owns the stocks in the S&P 500 and includes dividends along with (ultra low) fund expenses, would have returned a negative 3.6%. The only other interruption during the strong comeback was a 1.87% drop in October 2009.


For stocks, 2009 was the best of times and the worst of times. It was the end of an Age of Foolishness, but unlikely the dawn of an Age of Wisdom. 


Although bubbles appear obvious in hindsight, when you're in the midst of one, everything feels quite rational. Whether speculating in Florida real estate, Internet stocks, gold, or even tulip bulbs, most participants in the frenzy could recount their financial ruin by saying, "I guess you had to be there."


Fund managers are arguably quite skilled at determining relative valuations. For example, an emerging markets manager can tell whether a Brazilian telecom company is a better deal than a Mexican cement company, but he'll never sell his emerging markets stocks after realizing emerging markets may be in a bubble. That's our job. We pull away the punch bowl before the market gets too drunk.


Recently, fund investors have abandoned money market funds and similar near-zero interest investments, like short-term government bonds, in search of higher returns. Of course, being overly cautious is usually a bad idea. But trying to capitalize on irrationally high returns on higher-risk investments while eschewing safer investments isn't very smart, either.


Stocks should be the best performers over the next decade. This prediction has less to do with our overall outlook on the economy, market, and valuations, and more to do with where investors are putting their money. Investors often shift money to broad categories and specific areas after a hot streak and shortly  before a period of under-performance starts.


From the March low (hit just a few days after our last buy in our model portfolios), the market is up around 50% - among the greatest returns in a few months ever. Makes one wonder how much faster stocks could possibly go up in a short time period. What if the government did what everybody wanted it to do? Perhaps good and bad government policy is overrated as it pertains to stock prices.


We manage the MAXadvisor Powerfund Portfolios as contrarian investors. When fund investors are panicking and taking money out of stock funds, we try to increase our allocations. When they get their nerve back, often after a big rally, we tend to cut back. This doesn't make gut sense; stocks sure seem safer today than back in early March when the 'D' word (Depression) was being bandied about, but that's the irony of the stock market: It has more upside potential when it seems to have more downside risk and more downside risk when it seems to have more upside.


There's been a lot of talk about American consumers and what they'll do with their money once the dust settles. Most market analysts, economists, and prognosticators are quite certain that American consumers have fallen and simply can’t get back up. But just a few days ago, the market took off following a five-day slide, inspired by nothing more than news that the "sentiment index," one of the data points published by the Conference Board Consumer Research Center measuring the psyche of the consumer, "surged by the most in six years" in May. 


The recent market rally continues, but the faster stocks climb, the more our skepticism grows – not that we didn’t want stocks to rise following our trade at the end of February. If this momentum continues, we plan to cut back on stocks, particularly if mutual fund investors keep buying stock funds the way they have in recent weeks. 


They say it’s always darkest before the dawn. But then again, it’s pretty dark at 1:00 AM, too, and you still have a ways to go before the sun comes up.  Let's  consider a few basic financial factoids currently circulating: (1) stock markets typically recover before the economy does; (2) recessions rarely last more than a couple of years; and (3) compared to recent history, stocks are now cheap. 


As of Monday, March 2nd the S&P 500 is already down about 22%, including dividends, in 2009 – more than half of 2008’s loss of 37%. The market is now down over 50% from the peak in late 2007. We used this downward spiral to make some more changes to the portfolio, detailed in our portfolio commentaries a few days ago. The goal of this trade was to sell our successful inverse commodities ETF (after an over 300% return), cut back on some recently added closed-end funds that are no longer a bargain, and to increase our overall stock allocation slightly.


The New Year is traditionally the time of New Year’s Resolutions, “I will eat less and exercise more” or “I will quit smoking”.  New Year’s offers everyone a time to reflect on past behaviors and decisions and commit to resolutions to fix, or prevent, bad behavior. Unfortunately, the investment community doesn’t waste much time on such resolutions. If they did, the list of resolutions  for 2009 would be extensive.


Mutual fund flows are one of the primary indicators that tell us when and where to invest in our MAXadvisor Powerfund Portfolios.This current bear market demonstrates why popular investing ideas don’t belong in your portfolio – the investments most popular with fund investors have been the hardest hit. 


October 2008 was one for the record books. The Dow suffered two of the worst single days in its history: October 9th, closing down 7.33%, and October 15th, experiencing an even harsher 7.87% one-day drop. September wasn't much kinder, especially September 29th, when the Dow plummeted 6.98%, accounting for the nineteenth worst single-day drop in the history of the Dow.


In the last issue we noted we’d likely need to see a 500 point one-day Dow drop on some big bank or other company failure to get fund investors to panic sell at enough of a clip to warrant us stepping up again and buying. Monday’s Dow drop of 777 certainly fits the bill and surely led to some big sales. 


While we’re obviously pleased to own some big gainers especially in this hot-then-not market, we always get a little worried when funds in our portfolios start to attract attention – and money. Our idea of asset allocation is to allocate into out-of-favor assets and wait until they are in favor. This applies to stocks, bonds, and cash in general, and specific sectors or fund categories.


So much for efficient markets, the theory that stocks are always efficiently priced. Such theory doesn’t have much to say for how bank stocks trade these days – up or down over 10% almost every day as speculators simultaneously fear the next IndyMac Bancorp (the aggressive California bank originally named “Countrywide Mortgage Investments” – a name that says it all) but want to get in cheap for the eventual comeback.


In our commentary last month we noted how, over the last year, fund investors have been getting out of stock funds after the market slipped, then buying in after the market rose – the classic buy high/sell low cycle. A successful fund portfolio does not this behavior make, and doing the opposite is pretty much what the Powerfund Portfolios are all about. We are going to use June’s sharp pullback in stocks to increase our stock allocations and risk levels across the board.


Fund investors have a bad habit of buying high and selling low. They do so with specific funds, categories of funds, and the stock market in general. This behavior is one of the top reasons why, as studies have shown, fund investors underperform the stock market. This behavior is also the basis of most of our contrarian fund-investing decisions – we try to invest the way the typical fund investor does not. 


Until recently, investors’ defined commodities as anything from "generic goods used to make more valuable items" to "a high-performing asset class that diversifies a portfolio and offers protection against a falling dollar, inflation, world calamity, and just about anything else." Can you blame them? Since 2000, commodity indexes have outpaced nearly every other asset class. While the S&P 500 continues trying to claw its way back to where it was nearly a decade ago, commodities, especially oil – the Grand Poobah of commodities – just keeps climbing. 


The relatively low volatility stock market of the last few years seems a thing of the past. Today we see wild moves almost daily as the market swings from euphoria to panic.


Over the last year, the strategy that has hurt investors (mostly large institutional ones) the most has been, for lack of a better term, the "yield reach." We'll define this strategy as buying a riskier income-oriented investment in order to attain a higher yield.


We don’t know why the Dow soared to record highs in October amidst the deflation of one of the world’s largest asset bubbles in history. Nor can we explain why retailer’s stocks reached similar summits in 2007, especially given that a fair amount of consumer spending stemmed from ill-advised home equity extractions and the type of pseudo-confidence that occurs when you watch the value of your home, most likely your principal asset, double in just a few short years.


The Chinese New Year doesn't arrive until February 18th, and considering that the Chinese stock market doubled in 2007, while our own volatile yet underwhelming market has taken more than ten years to accomplish the same feat, perhaps we should focus more on other countries' goings-on.


Each December we review our own portfolio holdings for estimated year-end capital gains distributions (right around when most fund companies start publishing estimates). This information can be useful because investors may want to avoid buying a fund until after a big distribution, or in some rarer cases consider selling a fund before a big distribution.


In Alan Greenspan’s most famous market commentary, he merely hinted at the possibility of irrational investor exuberance. The ensuing far more irrationally exuberant behavior in the stock market was surprisingly ignored by Greenspan, at least publically. His second most famous market commentary centered on the 2005 bond market. Greenspan testified before Congress that the flat yield curve with low long-term interest rates around the globe was a "conundrum". 


Since late 2002, investments have gone up, up and away. Stocks, oil, metals, real estate, art, collectibles, classic cars – you name it. Every investment carries a higher price tag than it did then. In the last five years, it's been difficult to lose money. Everything has gone up. Or has it?


August certainly didn’t seem like a month that would end better than it began. The S&P 500 was up just over 1% - not exactly a barnburner, but given the turmoil in July and early August, nothing short of a miracle - and certainly the result of some sort of divine intervention. That divine intervention involved no less a deity than the Chairman of the Federal Reserve himself, who in mid-August reversed what appeared to be a true stock market death spiral


We can’t say we’re particularly upset about the recent drop. At the end of June we cut back on our stock allocations, increased our longer-term investment grade bond stakes, and even added some funds that short stocks. In fact, we’d like to see some more weakness in the market so we can go on a mini-buying spree. 


You probably already know that we did a bit of trading at the end of June. The giant red trade alerts on every model portfolio page (and our recent email alerts) were probably a dead giveaway. In fact, that set of transactions represented one of our most comprehensive block trades ever.


We use several strategies to add value to your portfolio. We select high-quality funds in areas that are currently out of favor, we increase stock allocations when stocks fall out of favor, and we cut back on stocks when they return to popularity. This article addresses the last strategy.


While it’s not quite the bubble-era Promised Land of “Dow 36,000,” the recent Dow 13,000 milestone is quite exciting, nonetheless. Any day now, it looks as though the S&P 500 (a better market benchmark that more closely mimics how most investors have fared) will break the record high it set over seven years ago. 


Last year, we wrote on MAXfunds.com, “Now that home price appreciation is leveling off, the ugly side from the growth of no-and low-money-down lending should rear its head.” The main concern in the stock market today is just how far the current sub-prime loan fallout will spread into the economy. Our opinion? Pretty darn far.


It has been quite some time since the Dow dropped over 500 points in just a few hours. The last time it happened, the biggest terrorist attack in our nation’s history was the culprit. This time, we had only the vague notion that the Chinese government is concerned enough about stock market speculation and their economy, to rattle our stock markets.


One of the big stories in mutual funds last year was the end to the famous  Bill Miller’s streak. In 2006 Legg Mason Value Trust (LMVTX) – the flagship fund managed by Miller – scored an unimpressive 5.9% return, missing the S&P 500 by a country mile (10%) and ended Miller’s impressive, unmatched, 15 calendar year streak of beating the most-benchmarked of indices. 


We’re always looking for signs of overly exuberant fund investors to guide our investing decisions. When fund investors get very excited about a specific fund, a category of fund, or even investing in general, it often pays to do the opposite, or at least ease up on whatever is catching their fancy. New fund launches—their volume and relative asset-gathering success—are tops on our list of contrarian indicators.


The end of the year is a tough time for fund investors. December is when most fund companies make large taxable distributions. December is particularly punishing after a few good years of stock market returns, which can lead to gains on the fund’s books that have to be distributed. These distributions are not good things. Unfortunately, year-end distributions are hard to avoid completely.


The big story lately is the incredible earnings growth of corporate America. As earnings are the core to long-term stock market returns, this is good news – certainly a better foundation of investment than boundless revenue growth or market share growth or user growth or even that “potential future maybe revenue growth” that was driving stocks a few years ago. 


Now that the stock market is past record highs again we are seeing resurgence in investor enthusiasm. Investors appear to be subscribing to the same pattern of investment idea generation that got the major indexes so ridiculously overpriced in the first place: letting backward-looking information and scenarios guide your current investment decisions. Call it what-ifs, woulda-coulda-shoulda strategies, or just investment soul searching.


As we've noted before, early this year fund investors were plowing tens of billions into funds – right before the market caved in. Now that market is rebounding, and inflows have improved again. This sort of buy high/sell low/buy back high is exactly why fund investors typically underperform the market, and why we try to do the opposite of what most investors do.


Inflation is increasing and economic growth is slowing. The Federal Reserve knows they created inflation with their recent stint of economic stimulus, but is worried attempts to cool the economy could cause a major recession. If they take a wait and see stance, inflation could spiral out of control even with a slow economy – the dreaded stagflation of the 1970s and early 80s


Let’s check in with what fund investors are doing – and as usual, consider doing something else.


While we have nothing against shopping around for a high-yield CD, we think you can do better with low-fee bond funds most of the time. In fact, our general forecast for stocks coupled with our risk aversion in our lower risk portfolios is why we own bond funds.


In case you’ve missed the nonstop media coverage, gasoline prices are again approaching $3 a gallon. Does this “crisis” situation offer any investment opportunities? Can it derail the economy and stock market? And why is gas so expensive anyway?


Oddly enough, the mundane (and molasses-in-winter slow) market events tend to hurt investors more over the long haul than sudden drops. Even adjusting for inflation, investors lost far more in 2002 than they did in 1987 - the year of the biggest one-day market decline in history. 


Jensen has spent a lot of its existence underperforming the market – so why does the fund have a couple of billion dollars under management, and why does it garnish so many accolades in the press and in the analyst community?


The MAXadvisor Newsletter is now MAXadvisor Powerfund Portfolios. But don't worry. Besides the new name, a streamlined design, and some new features, not much has changed. We're managing our model portfolios the way we always have - by choosing the best no-load funds in out of favor categories. 


Flipping is more commonly known as an inverted yield curve. In such a rare event, the yield on a 10-year government bond is lower than the yield on, say, a 2-year government bond (technically a note). What’s the big deal? Maybe nothing. Maybe something. Maybe a big something.


Sure April 15th gets most of the glory, but in the world of mutual funds, tax time is really in December. Why? Because that’s when stock funds typically distribute taxable gains to fund shareholders. 


Ben Bernanke is not an old Bush chum or just semi-qualified for the job. The stock market did not react badly to the news. Bernanke seems more than deserving of the top job in the entire world of economics. But as I dug a little deeper, I uncovered some details that are a little scary.


When the stock market closed on Friday August 26th, Hurricane Katrina was barely a blip on investors’ radar. The hurricane was a relatively ordinary Category 1 when it rolled through Florida with minimal damage. Monday told a different story, as it became clear that raincoat clad news reporters actually didn’t oversell this one. Not by a long shot.


There are countless ways to try to profit around the world, but how much you can expect to earn investing does have limits, at least in the long haul.


Investors tend to get something lodged in their head and latch on to it – sometimes to their peril. Making a reasonable assessment of risk is arguably the most important part of investing, closely followed by assumptions of possible returns. In simple terms, how much one can make compared to how much one can lose.


In this hunt for the unloved, we look at numerous factors. One way to help determine what broad style of investing to consider going forward is to look at what the biggest funds are doing.


Since the easiest way to follow our model portfolios is at a broker’s fund supermarket (verses buying the funds directly from several different fund companies), scrutiny of the available choices is important – especially since you pay for the convenience.


We've been beating the market indexes pretty handily (and with less risk) across our portfolios these past three years, in both up and down markets. As we've noted in recent commentaries (and our latest category favorites report), it's time to lighten up in some hotter areas.


We’re seeing many of these danger signs in the categories we have previously favored. As anyone who has owned funds in our model portfolios over the last few years has noticed, we’ve been heavily weighted in funds that invest in foreign stocks and bonds (notably emerging market stocks and bonds), small cap stocks (even microcap stocks), junk bonds, utility stocks, and value stocks.


One aspect that makes investing so frustrating is the unpredictable pattern stocks follows. The market is like a drunk stumbling home from a bar - you can’t expect a straight path, but you can be reasonably sure of the final destination – home.


Last month we shared the unfortunate news that Scottrade is raising their mutual fund buying fees. This month we will go into greater detail about the alternatives to Scottrade. 


For Powerfund Portfolio subscribers, the most efficient way to invest our model portfolios is through a so-called “fund supermarket” at a broker like Scottrade. This way an investor following our model portfolios can trade and track the funds from all the different fund families we recommend, all in one place. Unfortunately, using a brokerage platform usually adds a layer of extra costs. As expenses cut directly into your investment returns, it’s important to pay as little for trades as possible. At some brokerage platforms, these fees can be quite expensive. 


Sure April 15th gets most of the glory, but in the world of mutual funds, tax time is really in December. Why? Because that’s when stock funds typically distribute taxable gains to fund shareholders. Throughout the year, fund managers sell stocks at a profit. Some companies that mutual funds own pay dividends. Each year – usually in December - a fund has to distribute these realized gains and incomes to fund shareholders or face tax penalties. 


With Halloween all wrapped up, we felt now is the time to discuss our current investing fears. Here are the two biggest concerns today.


The regulatory spotlight returned to the world’s largest mortgage buyer, Fannie Mae (FNM), this past week. What they see is not pretty. And neither is what the worst case scenario would mean for your mutual fund investments, to say nothing of your home and your future tax bill.


The economy and the stock market are much bigger than any one elected official, even the President. That said, the executive branch’s economic policy can move markets, particularly certain types of securities.


As the market moved higher over the last year we made changes, selling some of our hotter stock and bond funds and then moving the proceeds to more conservative funds. Longer-term subscribers will remember that in late 2002, while the market was falling, we moved out of cash and into more aggressive funds. 


When a transition is complete the last great industry continues to exist in the economy, but grows at a slower pace and becomes a smaller percentage of our national product. Today’s outsourcing (or offshoring) of technology jobs is a sign that America’s current leading industry is about to be replaced by another.  What will replace it? Financing.


Suddenly oil is on everyone’s mind. It was inevitable – high oil prices always attract media and investor interest. Oil demand is up, supply is weak, fears are high, competition is low. Will high oil prices kill the economic goose that lays the golden stock market?


Each and every fund in each and every model portfolio can now be purchased on Scottrade’s no transaction fee (NTF) platform, which means that investors can buy and sell them without paying a fee of any kind. We synched our portfolios with Scottrade’s platform because Scottrade has the highest number of funds available for sale without transaction fees.


Since few systems to predict the many ups and downs work consistently, the practical solution is to stay invested at all times. The only way to time the market is to spend as much time in the market as possible. 


The main reason we don’t trade actively is that our fund investing strategy is reasonably long-term – when we like an area of the market or category of fund we usually like it for reasons that are anything but trendy. 


We discussed many of the issues you need to think about when managing your portfolio in a past newsletter. One more area of interest by subscribers as tax season approaches is municipal bond funds. We don’t have any of them in our model portfolios. Why not, and should you own some?


Economics is the science nobody cares about until the economy stumbles. When it does, everyone wants to know why unemployment is rising and why their stocks are falling. Humans like to hear answers to unanswerable questions. It’s why some cultures had a god of rain they would pray to during the dry seasons.


All seven MAXadvisor model portfolios have had great years, but they won’t make any of our subscribers any money if nobody actually invests in them. To make the model portfolio investing process as easy as possible, we’ve developed this short guide. 


Our Powerfund Portfolio lead article from October 15th 2002 was written during what was a difficult period for investors. On October 9th of 2002 the Dow had fallen to 7,286. We laid out the case for stocks being a relatively good place to put your money at current valuations. 


As the Powerfund Portfolios are primarily mutual fund focused, some of you are probably wondering what our take is on the burgeoning mutual fund scandal. Are mutual funds bad news, MAX, and what can an investor do to avoid being ripped off?


Investors these days expect a lot from the companies they are buying stock in over coming years – earnings have to grow to meet current high expectations. Investor’s expectations tend to be wrong, not just about earnings and stock prices, but about Wall Street in general. Look no further then the scandals of recent years.


At the end of July we made some changes to the model portfolios. We mentioned this was coming in our last newsletter, and alerted subscribers to the actual changes when we made them.


All of our model portfolios are up since we launched them at the beginning of April 2002 save one, the Daredevil portfolio (our most risky) which is down 1.2%. We’re satisfied with this performance as the Dow, S&P 500, and NASDAQ are still down 12.42%, 13.4%, and 12.47% respectively in the same period. 


We’ve had a remarkable streak of choosing funds for our model portfolios that, soon after our allocating them, were either closed to new investors or were purchased by other fund families and converted to load funds.


Since the market peak of March 2000 stocks have lost money with some brief run-ups, while bonds have largely made money with some brief pullbacks. In statistical terms, the behavior of stocks and bonds over recent years is called low correlation


Let’s look back over the last 12 months since we launched the Powerfund Portfolios at what has been going on in the markets and with the 7 model portfolios we follow, and how we have done compared to the market and other benchmarks.


According to some January Effect proponents, January has predicted the year's returns over 90% of the time. This is why many investors are nervous these days. January ended down. If the January Effect is true, this means we have a 90% chance of losing money this year in the market.


On the surface, spending money is a great way to jump-start a weak economy. Ever since the government became such a large part of the economy (can you believe we didn't even have an income tax before 1913?) government tax and spend policy (AKA fiscal policy) has been used to "manage" economic growth.


If you recall from the last few issues of the Powerfund Portfolios, we talked about the panic investors felt when the Dow was in the low 7,000's, and how everyone had become severely risk averse. Much money piled into "safe" government bonds, lowering yields. Recently, as the market rallied back sharply, many of these same investors forgot all the things that made them scared in the first place - corporate scandals, a weak economy, looming war and terrorist threats, and lackluster earnings (to name just a few).


While there has been good news on some economic fronts, the sad fact is most of the activity in the markets is primarily from two forces: 1) the alternatives to stocks are bleak 2) the nagging feeling among investors that they if they don't get in now they could miss out on some action.


In the last issue of the Powerfund Portfolios we explained why treasury bonds may start being less of a sure thing, and might even surprise investors by their lousy returns as rates go back up sometime in the future (how's that for a prediction that can't go wrong?). This month we want to get back to the issue on everyone's mind: stocks. Namely, are stocks cheap, and can investors expect to make any money in them anytime soon?


How hot are "safe" US government bonds? They were up around 4% in August, after a big run in July amidst the market chaos. In fact, long-term government bonds, the kind the government recently decided they didn't need to issue anymore, are up over 12% this year so far. That's a lot of money to make in a safe investment.


Tabloid news headlines aside, the real trouble - as it's been for some years now - is valuations. Stocks were priced for perfection when anything but became the market environment. More troubling, stocks were richly valued assuming the numbers (earnings and revenues) were "on the level", which, sadly, they were not.


Any way you slice and dice it, the market is expensive. This is not a new thing. The market has been expensive for at least the last decade, if not longer. We've been complaining about valuations being sky high for years, but that doesn't mean there aren't good categories of funds in which to put your money. You can still invest in a historically overvalued market, and probably should.


It wasn't all bad news. Small cap value indexes rose around 3 - 4%. For those keeping track, these types of stocks are now up well over 50% since the large cap indexes hit the skids. That's a pretty big move... for stocks that aren't really growing earnings, broadly speaking.


Is it me, or does it seem like the Dow has been kicking around 10,000 forever? Forever actually started in 1999 when the Dow first broke 10,000. It's been kicking around in the 9,000 - 11,000 range ever since.