Actively Managed Funds Struggle Amid Crisis

Here's a good article from the Wall Street Journal. I've copied the article in case the link stops working. The link is at the bottom.


By Paulette Miniter | SmartMoney

If you ever wondered whether it pays to buy an actively managed mutual fund, this year's dismal results don't help the industry's cause.

Fidelity's 2008 is a case in point. Among the largest U.S. mutual fund companies and 401(k) providers, Fidelity is primarily an actively managed fund shop. But its year-to-date performance for U.S. stock funds is slightly below that of Vanguard's, which is known for its inexpensive indexed-based funds.

The average Fidelity U.S. stock fund was down 34% through Monday, compared to -32% for Vanguard, according to Lipper. That's about where the overall stock market is, as well.

Fund companies always like to remind us not to overemphasize short-term results. But the numbers are a stark example of where active stock-picking can lead a portfolio. This is especially relevant if you're paying extra for the active management. Although Fidelity sells many good low-cost funds, on average its diversified U.S. stock funds have an expense ratio of 1.24% compared with 0.20% for Vanguard, according to Morningstar. For all their equity funds, the averages are 1.32% for Fidelity and 0.20% for Vanguard.

The question now is, should you stick with an active fund manager who made clear missteps this year but has done well in the past?

"It's not that these managers who have done well for a number of years just turned stupid all of the sudden," says Tim Courtney, chief investment officer at Burns Advisory, an independent registered advisor firm in Oklahoma City, who is advising clients to try and stick it out for when the market rebounds.

He points to Bill Miller, of Legg Mason Value, who had beat the S&P 500 for 15 years straight until a couple of years ago. Miller's fund, which has an expense ratio of 1.68% for primary class shares, is down a whopping 48% this year. "We'd expect it to lag badly at times, due to Miller's bold approach," Morningstar analyst Greg Carlson has said.

"There is something strange about the market we're in. It's leading a lot of actively managed funds to make wrong decisions, and it's making their funds look bad in the short run," Courtney says.

Another example is Fidelity Magellan, which although actively managed is cheap with a 0.72% expense ratio. It's down more than 40% this year, worse than its peers and the S&P 500. Last year, though, it rose 19% under the same manager, Harry Lange. What happened? One of its top recent holdings was American International Group, which is down to about $2 a share after starting the year at $55. The feds had to bail out AIG amid the heat of the credit crisis. However, the fund has also taken big hits on companies outside the finance sector, including from its biggest holdings, Nokia and Corning.

Despite the bad showing year to date, Morningstar analyst Chris Davis still thinks Lange will "eventually reproduce his past success."

"If the fund's dramatic underperformance shows anything, it's that Lange is no index hugger," Davis says. "That willingness to be different has backfired in a dramatic way this year, but it's been Lange's ticket to success over the long haul."

OCTOBER 22, 2008, 3:53 P.M. ET
Source: Wall Street Journal, http://online.wsj.com/article/SB122470413376959381.html

I'm Losing Control!!

Todays post gets at the heart of the issue in times like this. I'm reprinting article from Jason Zweig. Zweig writes a column for the WSJ and is a writer we quote often in our coaching sessions with clients as well as our regular day to day interection with you. Todays column is appropriate and very timely. Please take the time to read it in its entirety. You'll be glad you did.

THE INTELLIGENT INVESTOR
OCTOBER 7, 2008
By Jason Zweig

So do you feel like quitting yet?

If Monday's 800-point intraday plunge in the Dow Jones Industrial Average made you want to give up and get out of stocks, you're not alone.

I've written column after column advising investors to buy stocks on the way down, and readers are in pain. "You say not to bail," one reader emailed me over the weekend, "but all funds are down. ... This whole stock market has me so upset, [I feel] like a deer in the headlights." Another wrote: "We are, you see, about to enter another Great Depression, just like the last one only much worse. ... It's way too early to be buying stocks. ... Or I could be really nasty and ask you which brokerage house paid you to run this stupid column now."

Right or wrong, I work only for The Wall Street Journal. But what all of us are feeling is the loss of control we sense when we are faced with anything that is frightening, inexplicable and important.

That lack of control not only makes us feel powerless; it also changes the way we view the world. Very small amounts of fragmentary information can suddenly seem to be fraught with meaning: Did something move on "the grassy knoll" the day John F. Kennedy was assassinated? Will one down day in the stock market lead to another and another?

Even the greatest investors have felt the same kind of fear and pain you are probably feeling. For proof, look no further than "Security Analysis," the classic textbook by Benjamin Graham and David Dodd, which has just been reissued in a commemorative edition. Graham was one of the best money managers of the 20th century, a brilliant analyst and market historian, and Warren Buffett's most influential teacher and mentor.

The new book reprints the text of the 1940 printing, in which Graham addressed the market devastation of the previous decade. Just as the roughly 90% fall between 1929 and 1932 had seemed to be fading, the stock market dropped sharply again in the late 1930s. As market historian James Grant puts it, by the time Graham was ready to finish the 1940 edition, "He had had it."

That helps explain one of the great ironies of market commentary. Graham himself stuck largely with stocks in his investment fund. But at the conclusion of his book, he advised the institutional investors among his readers to shun the stock market entirely and invest in bonds. Graham doubted they could stomach "the heavy responsibilities and the recurring uncertainties" stirred up by stocks.

How does the feeling of being overwhelmed affect investors? Research conducted by psychologists Jennifer Whitson of the University of Texas and Adam Galinsky of Northwestern University shows how it changes our perceptions. In one of their experiments, people were first rattled by a computer that gave them unpredictable feedback on their performance at a trivial task, stripping them of their sense of control. These people became much more likely to perceive shapes in a swarm of random dots.

"When you sense that you have a lack of control," says Prof. Whitson, "you're much more likely to try twisting and pretzeling explanations and seeing patterns that aren't even there."

In a related experiment, investors who had been stripped of their sense of control by market volatility were convinced that they had read more negative evidence about a company than they had actually seen -- and were less willing to buy the company's stock.

In other words, when our sense of control is threatened, we feel the natural urge to pretend that whatever information we do have is more complete and reliable than it is. Imagining that we know what's coming next (even if we think it will be bad) gives us a slight feeling of comfort.

As an investor, however, it's absolutely vital to separate what you can truly control from what is beyond your control. The only thing you can know for sure is that stocks are steadily getting cheaper. You cannot control whether or not the market will continue to trash stocks, but you can control how you respond.

If we are not headed into a depression, panic hardly seems justifiable.

What if we are?

Even during the Great Depression, the best investment results were earned not by the people who fled stocks for the safety of bonds and cash, but by those who stepped up and bought stocks and kept buying on the way down. A man named Floyd Odlum made millions of dollars putting his cash into battered stocks. His motto throughout the market nightmare of 1929 to 1932 never changed:

"There's a better chance to make money now than ever before."

Is Cash Really a Better Option?

Here's a really good article from the New York Times that addresses one of the most common responses to a market downturn - moving your money to cash. Before you do, read the rest of this article and call us with any questions.


Switching to Cash May Feel Safe, but Risks Remain
By RON LIEBER
Published: October 9, 2008

It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September, according to TrimTabs Investment Research.

“What clients are looking for is safety,” said John Bunch, president of retail distribution at TD Ameritrade. “They are seeking solutions that are backed by the federal government. Specifically, F.D.I.C-insured money funds and certificates of deposit. All of it is under the umbrella of, ‘Am I safe and insured?’ ”

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.
But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.

H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan, put together a study in 2005 for Towneley Capital Management, where he tested the long-term damage that investors could do to their portfolios if they missed out on the small percentage of days when the stock market experienced big gains.

From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains.

This fall, Javier Estrada, a professor of finance at IESE Business School in Barcelona, published a similar study in The Journal of Investing that looked at equity markets in 15 nations, including the United States. A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout.

So moving to cash right now is just fine as long as you know precisely when to get back into stocks (even though you didn’t know when to get out of them).

At some point, stocks will indeed fall enough that investors will remove the money from their mattresses and put it to work, causing prices to rise significantly. But, as Bonnie A. Hughes, a certified financial planner with the Enrichment Group in Miami, put it to me, there won’t be an e-mail message or news release that goes out when this is about to happen. It will be evident only afterward, on the few days when the market surges.

And it gets worse for those who think they won’t have any trouble investing in stocks again later. Medium- or long-term investors who are considering a big move into cash right now are probably making an emotional decision, at least in part. For those who follow through, the same instincts will probably hurt when trying to figure out when to reinvest in stocks.

“The emotional forces that drove them out of the market aren’t likely to let them back in ‘until things are better,’ ” Dan Danford of the Family Investment Center in St. Joseph, Mo., said in an e-mail message. “And for most people, things won’t feel better again until the market has already moved back up.” In fact, he added, plenty of people may not allow themselves to get back in until the market has already risen significantly.

That situation is worth considering if you think your mood, or returns, can’t get any worse. “People feel worse missing out on the bounce-back that will inevitably come than they do hanging in there through the down period,” said Elaine D. Scoggins, a certified financial planner with Merriman Berkman Next in Seattle.

The truly downbeat do not see the bounce as inevitable. This outlook is essentially a bet that our current predicament is so different that the equity markets won’t bounce back at all, even though they survived 1929, the Great Depression, 1987 and a major terrorist attack. I do not believe that the markets are in some kind of permanent decline, and I haven’t found an expert who does.

That said, some retirees, or those close to leaving the work force, may be well-off enough to leave stocks behind for now. If the tumult in the economy and the decline in the markets have altered your risk tolerance, then it may make sense to move to a portfolio of Treasury bills, certificates of deposit and money market funds.

Michael G. Coli, 56, of Crystal Lake, Ill., decided to take his 401(k) money out of the market in February. As an investor in his sons’ pizza restaurants, he noticed that an increasing number of customers were relying on credit cards. And as the owner of a winter home in Naples, Fla., he witnessed the housing market dive. Taken together, he decided to pull his retirement money, which he would need in five years, from the Vanguard Balanced Index Fund and move it all into certificates of deposit.

“I had the feeling the economy was not on real firm ground,” Mr. Coli said. “I decided to get out and put it all in C.D.’s, and that is where I’ve been ever since.”

If you can’t afford to live off the proceeds of cash investments (or dividends from your investment in your kids’ pizza joints), you may have no choice but to hold on to whatever stocks you have left. Then, you can hope for a rebound that will allow you to live out your later years more comfortably. Selling now and moving to cash could mean guaranteeing a lower standard of living for the rest of your life, because you’d be locking in your losses.

But if you’re a bit younger, try to think of your investment portfolio in the same way you consider the value of your home, if you own one. After all, if you’re not moving anytime soon, your home is a long-term investment, too.

“Today’s price is not your price. Your price is 10 or 20 years from now,” said Thomas A. Orecchio, of Greenbaum & Orecchio, a wealth management firm in Old Tappan, N.J. “Unfortunately, stock market investors don’t always see things that way.”

Tara Siegel-Bernard contributed reporting.

Copyright © 2008 The New York Times

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History of Home Prices

Here is an entertaining perspective of the housing bubble. For those of you who get sick at the IMAX theater, better have some dramamine ready.



This production was created by the folks at www.speculativebubble.com

Here's the chart that the roller coaster was based on (click on the image for a larger view):





















The source for the chart is from Robert J. Schiller's "Irrational Exuberance," 2nd Edition. 2006