Making Money Alert
Did We Just See A Capitulation Sell-Off?
03/04/2009
Monday's huge market sell-off pushed stocks to levels we haven't seen since 1997. The selling early this week, along with the bounce that took place in Wednesday's session, has many people wondering if we have just seen the capitulation sell-off that Wall Street has been hoping will occur.
A big capitulation sell-off usually is followed by a significant bounce, and with stocks lower than they have been in more than a decade, many investors are hoping the recent sell-off represents the best buying opportunity we've seen since the 1930s.
I think the answer to the question of whether we are at the precipice of a great buying opportunity right now is still an open question.
The reason why I am uncertain about the recent sell-off being "the big one" in terms of capitulation is that with all of the doom, gloom and uncertainty out there right now, we very well could see a much bigger sell-off in the very near future. In fact, the only way we are going to be able to call this "the big one" is in retrospect.
If we take a look at the chart below of the S&P 500 Index, we see a precipitous drop in value to below the 700 level. And while this might look like a capitulation sell-off, as I said in my interview on CNBC this morning, I think we have to fall into the mid 600s on the index before we can say that today's market bounce is more than just another in a long line of bear market rallies.
So, what do I think investors should be doing right now?
Well, with all of the volatility out there, you simply have to think like a trader. You have to use the tools that successful traders use. That means that you have to be willing to move in and out of stocks in search of short-term profits. That search must include things like using trailing stop losses on every position that you own, and taking profits off of the table quickly, while avoiding any temptation to be too greedy.
These tactics, and many others, are the ones I employ in my ETF Trader advisory service. In my view, putting money to risk in this market is like sticking your face into a lion's mouth. If you don't take steps to make sure you're safe, then you could get your head bitten clean off.
For more on how to trade in this volatile market, check out my ETF Trader advisory service by clicking here.
Finally, I want to let you know that amid all of the pessimism out there regarding the markets and the economy, I have decided to provide you with a weekly dose of positivity. In today's video link (see above), I talk about how to stay positive, and how to prevail during these difficult market times.
If you're in need of a positive reinforcement, then today's video is just what the doctor ordered.
Perseverance, Toughness and Smart Fiscal Decision Making
Just because we don't know what the market's future will bring doesn't mean we can't make a few proclamations about the nature of markets, and the operation of market psychology.
First, whenever you get big sell-offs like we've seen so far in 2009, and for that matter since November 2008, a buying opportunity -- even if only a short-term one -- is very likely to present itself. Stocks do not go straight up even in the most bullish of times, nor do they go straight down in the most egregious of bear markets. What this means is that, most likely, at least a short-term buying opportunity is probably headed our way before long.
With respect to market psychology, I want to take a wider view on what's happening now. This glimpse hopefully will give you a better sense of what is really driving these markets lower. More importantly, I hope it will help you to see things from a different, more positive perspective.
It is my view that one of the things contributing to the sell-off in equities of late is the unrelenting negativism coming at us via TV news, radio, print media and our leaders in Washington. It's impossible these days to go more than a few minutes without hearing about how dire things are in the markets and the economy.
Now I am no Pollyanna, but to listen to the news these days you'd think that Armageddon was penciled in on next week's calendar.
Think about it. Even in the best of times, watching the news can make you think the world is a much worse place than it actually is in reality. Right now, however, watching the news is an exercise in masochism. If you want to feel like crawling under your desk with a flashlight, some canned goods and a pacifier, then just keep your TV sets glued to CNN or MSNBC.
What I want you to understand -- both in general terms and with specific applications to your investment decisions -- is that the world is not on the verge of crumbling. Sure, there are real problems confronting us, but in my opinion these are problems that can be conquered with a little perseverance, a little mental and emotional toughness -- and some smart fiscal decisions.
It always has been, and always will be, the goal of this publication, as well as all of my advisory services, to help you cultivate all three of these components -- perseverance, toughness and smart fiscal decision making. Why? Well, because when it's all said and done, it is these three qualities that comprise the whole of a successful, happy and financially sound person.
There are few guarantees in life, but one thing I will guarantee is that if we cultivate the perseverance, mental and emotional toughness, and smart decision making necessary to attain a winning and happy life, we'll be putting ourselves in a position to prevail no matter how severe or sublime the events around us may be.
So, the next time you feel like jumping on the train to Bluesville, resist the temptation and choose to conjure up your inner hero. By doing so, you'll be a lot happier, you'll be a lot stronger, and you'll make much better decisions -- both fiscally, and in every other aspect of your life.
Mutual Funds are Hazardous to Your Wealth
I wrote this article for Marketwatch.com, and it was originally published February. 15, 2009. I am presenting it here for the benefit of you, the Alert reader.
Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to overcome. Certainly, Wall Street titans, reckless lenders and irresponsible home buyers all deserve their share of the blame.
But one part of the financial world has not received much scrutiny for its role in the evaporation of investor wealth, and that is the mutual fund industry.
Mutual funds control the majority of Americans' retirement assets through 401(k)s, IRAs, and annuities. Sadly, a gullible public has bought into the idea that investing steadily in mutual funds, regardless of market conditions, is the way to make their financial dreams come true.
This is one of the biggest fallacies of investing, and why mutual funds are hazardous to your wealth.
To give you a sense of just how flawed the buy-and-hold philosophy advocated by the mutual fund industry was in 2008, just look at the numbers. According to the mutual fund industry's own Investment Company Institute, investors lost almost $3.7 trillion in mutual funds in 2008. Yet how often do you read about mutual funds leading the public down a losing path? How often do you hear about a fund manager whose performance was drastically lower than the benchmark?
Fundamentally Flawed
My problems with mutual funds don't stop merely at poor performance or inept fund managers. There are serious problems with mutual funds that have more to do with the design and structure of these investment vehicles. In fact, there are so many fundamental flaws inherent with mutual funds that they have become obstacles to successfully growing your investment portfolio -- chiefly:
1. The fund's interests are at odds with yours
Mutual fund companies have one primary objective: to make a profit. Unfortunately, this profit is not for you, but for them. While I will never disparage a company for having a self-interested goal of making a profit, when that profit comes at the expense of your best interest it deserves condemnation.
2. No transparency of holdings
A murky understanding of what securities you own at any given moment is another fundamental flaw of mutual funds. This lack of transparency essentially leaves you guessing about what you own and why. I can't think of a more unsettling feeling in a bear market than not knowing if you have exposure to toxic assets.
3. No transparency of fees
Here again we have a lack of clarity, but this time it's about what kind of fees you are paying. Sure, mutual funds are required to tell you they charge fees, but do you really know what you're paying for? In this bear market, the last thing you need is to be hit with some obscure cost you don't understand. But mutual funds are able to bury the specifics of their often very high management fees. That means you really have no idea what you are being charged.
4. All invested, all the time
The charter of most equity mutual funds compels the fund's manager to be allocated to stocks in virtual perpetuity. Most funds must maintain a significant allocation to the market, no matter the conditions. It doesn't matter if stocks descend to near Depression-era values. According to their charter, most fund managers must remain almost fully invested. To be sure, a small percentage of funds don't have that restriction, but most do.
5. Peddling bad advice
Perhaps the most onerous of these flaws is the bad advice that mutual funds dish out. Fund companies have an incentive for you to be in the market all of the time because that's how they make money. It doesn't matter if the market undergoes a downward spiral the likes of what it did in 2008. The mutual fund folks want you to stay the course, and that's what they'll advise you to do.
Advocating buy-and-hold investing is the backbone thesis of most mutual funds. A fund company will never tell you to move to cash when things get tough because it's just not in their best interest. Because most mutual funds must stay fully invested all the time, their concern for managing risk is secondary to their concern for keeping you fully invested.
If you have a portfolio worth $250,000 or more that's currently locked up in flawed mutual funds, my advisory firm, Fabian Wealth Strategies, can help. Contact us today at 800.391.1118 or visit www.fabianwealth.com to discuss how we can help you break away from the confines of mutual funds -- and the antiquated strategy of buy-and-hold.
The Audacity of Debt
Last week, President Obama delivered a $3.6 trillion budget to Congress. He says the budget is aimed at expanding government activism, increasing taxes on affluent families and businesses, and ending what he calls, "an era of profound irresponsibility."
This new era of responsibility comes complete with the biggest budget deficit since World War II. According to the president's own estimates, his budget calls for a $1.75 trillion deficit for the 2009 fiscal year. That is the highest one-year deficit ever in dollar terms, and amounts to a 12.3% share of the economy.
According to the budget's own projections, in 2010 the deficit would dip slightly, but we are still staring at a $1.17 trillion deficit.
The proposal for fiscal year 2010 was described by The Wall Street Journal as, "one of the most ambitious policy prescriptions in decades." It calls for a reordering of the federal government's priorities to provide national health care, to take a bigger role in our education system, and to essentially shift the energy economy away from oil and gas and into alternative energy sources.
How all of this affects investors is yet to be determined, but the administration's audacity for piling on debt in this budget proposal is something I thought every Alert reader needs to know.
ETF Talk: Treading Treacherous Waters for Dividends
Dividends are a great way to earn some extra income. You also can grow your principal through capital appreciation with good dividend-paying equities. One way to gain both of these benefits is through dividend-focused exchange-traded funds (ETFs). But the path to doing so has become increasingly treacherous for investors to follow as once-solid corporations struggle for survival. If you are an income-oriented investor, here are four simple tips on how to select these types of funds.
First, pick ETFs that hold stocks in stable companies with sustainable dividend yields. In this market, even traditional dividend-paying companies such as Bank of America, General Motors and Citigroup, have suspended their dividends because of poor performance. In 2008, 62 companies in the S&P 500 cut their dividends. To protect your capital and to enjoy steady income, choose ETFs that invest in companies likely to continue paying dividends.
Second, find ETFs that are invested in cash-rich companies. As I have said many times before, in bear markets, cash is king. Cutting dividends harms the company's reputation and typically hurts its stock price, as well as your principal. Find ETFs that hold stock in firms with fat cash positions and your dividends likely will keep coming.
Third, beware of ETFs that have too much exposure to any single sector. Take a close look at the financial or energy sectors, since any ETF that follows these sectors could be down more than 50% in the last year -- costing you much of your initial investment. Remember, when earnings fall sharply, dividend cuts often follow.
Finally, and possibly most important, do your homework before you buy any ETF. Know its holdings, find out if the fund is leveraged or not, check its past performance and make sure that it is well-diversified.
ETFs are a great and easy way to moderate risk in any portfolio, especially in times of volatility. Several studies have found that dividend-paying stocks held for the long run provide better risk-adjusted returns than low-paying ones. Also consider your appetite for risk and your short- and long-term financial goals. Then, invest accordingly.
While I currently am not recommending any of the dividend-paying ETFs in the table below, the tips that I have shared should help you in assessing them.
ETF | Symbol | Yield |
|---|---|---|
First Trust Value Line Dividend Index | FVD | 4.24% |
WisdomTree International SmallCap Dividend | DLS | 6.46% |
| Claymore/Zacks Multi-Asset Income | CVY | 12.04% |
S&P Dividend SPDR | SDY | 6.27% |
If you want further guidance about which dividend-paying ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.
TV Talk Show Host Wisdom
"Think like a queen. A queen is not afraid to fail. Failure is another steppingstone to greatness."
-- Oprah Winfrey
I must admit that I never thought I would be quoting a daytime TV talk show host in the Alert, but this pearl of wisdom really hit me as a great way to look at things. I realize there has been a lot of failure out there in our markets and our economy, but if you think of what has happened as a learning experience and a launching pad for growth, you'll be in a much better position to make the most of otherwise negative circumstances.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.