Benjamins Yarn

With the stock market stubbornly refusing to settle down and smooth out, Wall Street has been scrambling to come up with “product” they can sell to gun shy investors.

One such new concept is the Lifestyle fund; an extremely diversified package designed to be the single fund in an investor’s portfolio.

There are two general types of these funds, in which assets are spread out across a wide range of stocks and bonds. In one, securities are held directly, in the other, assets are held through other funds.

Fidelity’s Freedom 2030 is an example of the first type. It targets a specific retirement date, and the cash and bond stakes rise as that date approaches.

This type of fund has created a perception among investors that its value will not drop and that it is safe. But, in fact, these are no safer than a standard mutual fund.

Since we sold all of our investment positions on October 13, 2000 and preserved our capital, Fidelity Freedom 2030 has lost 39% (through 2/21/03). Do you think that’s an isolated incident?

I’m not picking on Fidelity, but here are some of their other Lifestyle funds with returns over the same period:

Fidelity Freedom 2020: -34% Fidelity Freedom 2010: -22%

So much for perceived safety.

The other Wall Street bright idea is the fund of funds (FOF). It sounds good, but it actually creates a double layer of costs; the cost of purchasing the fund itself, and then the expenses of the mutual funds the FOF purchases. Take for example, the Enterprise Group of Funds. It shows an expense ratio of almost 2% plus a sales charge of 4.75% according to Morningstar. Tack on the underlying expenses and you’re paying out more than 3% a year in investment expenses.

If you’re a new investor (with less than $10k), and have your account at a discount broker, you can add a minimum of 1% per year in fees just for the privilege of having an account. That brings the total up to 4% in annual expenses. Talk about adding insult to injury.

FOFs are sometimes being touted as the only fund you need no matter what the investment climate. So, let’s compare to see how the Enterprise fund of funds performed during the same period as mentioned above for the Freedom funds:

Enterprise Group of Funds: -35%.

The bottom line is that no matter what type of mutual fund you choose, or what anybody claims it will do for you, you must be vigilant and see if it does what you were told it would. In investing, there is simply no such thing as a sure thing. Sure you need to know how to recognize a good investment.

But just as importantmaybe even more importantyou must know when to recognize that a good investment idea didn’t work out, cut your loss, and sell.

About The Author

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped hundreds of people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: http://www.successful-investment.com; ulli@successful-investment.com

Wizened Wall Streeters say that you’ll have more investing
success if you remove emotion from your buy and sell decisions.
Perhaps the most emotionless approach is program trading.

This is a generic term used to describe trading in stocks,
options and futures based on price relationships and not on the
underlying fundamental strength or weakness of the company or
index. If you see the DOW suddenly turn from plus-50 to minus-50
without big-time breaking news, it’s probably the result of
program selling. The same goes if a declining index spurts into
positive territory within the span of a few minutes; that’s
likely a buy program hitting the market.

That’s what happened Thursday, November 20, 2003 in the final
hour of trading. The DOW and NASDAQ were nicely green when a
sell program hit. Down they went, and by the close the DOW was
down 71 and the NASDAQ off 17.

It’s completely legal and performed by all the major
institutions. They have the capability to dump millions of
shares in a sell program; conversely, they’ll grab millions of
shares in a buy program when they are in an acquisitive mood.

The trades are usually triggered automatically at specific price
or technical levels like the 50-day moving average or DOW
10,000. The trigger point is often chosen many days earlier. The
computer does the work. It’s the ideal “set it and forget it”
style of investing.

Many times program trading sets the stage for a strong or weak
open to a trading session at the NYSE or NASDAQ. If you read in
our e-mails that the S&P futures are soaring well ahead of fair
value in pre-market activity, the odds are that institutions
will automatically sell the futures at the open and buy the
underlying stocks to set the stage for a big gap higher. The
same can happen in reverse if the futures are collapsing.

If you hear a reporter on a financial station talk about
“rotation” from one sector to another, he’s probably referring
to one or a series of programmed moves. In that case, the
institutions have picked a certain price level to shift from,
say, cyclicals to small caps. The swap usually impacts most of
the stocks in those sectors.

The sudden appearance of a buy program or two can also create a
“short squeeze” in which traders decide to buy shares of stock
to cover an eroding short position. The increased buying
pressure, adding to the programmed buying, can dramatically
increase the upward momentum.

Dueling buy and sell programs were staples of the 1990s bull
market when volatility often ruled the exchanges. Even today, as
much as 30% of NYSE daily activity is pegged to program trading.
Whenever the market begins to rally, you may see more of this
volatile action.