Earlier this year I
blogged about the technology sector returns and warned against jumping on the bandwagon. Well, not only is the tech sector still on a rampage, the market had its strongest quarterly stock gains in more than 10 years.
After a poor first quarter of 2009, and “not as bad” economic news following a dreadful 2008, the market began rebounding in March and remained strong in April and May. According to Lipper, 98% of all equity and mixed-equity funds were in the green for the quarter ending June 30. The average equity mutual fund was up 19.77%, and 77 out of 78 equity classifications were on the plus side.
It’s a welcome relief from a painful 2008, but don’t forget about managing your portfolio risk through diversification -- probably a point that doesn’t need to be reiterated after such recent market turmoil.
Let’s take a look at some of the second quarter performance numbers*:
World Equity Funds +26.66%
US Large Cap Funds +15.86%
US Small Cap Funds +21.80%
US Dollar against the euro -5.84%
US Dollar against the pound -11.87%
Oil +40.74%
*Source: Lipper, a Thomson Reuters Company
Diversification between various asset classes is a basic rule adhered to by many mutual fund investors. As of late, I have been hearing more and more about the problems with diversification. The naysayers say diversification no longer works.
Simply put -- the cynics are wrong. We should all know by now that if you own U.S. equities and international equities, small cap and large cap, and growth and value, that they are not negatively correlated -- there is systematic risk. In other words, if you buy a US mutual fund and an international mutual fund, you shouldn’t expect that if the US market goes south then the international market will only go north. That’s not the point of diversification amongst various equity asset classes/styles.
A popular saying with respect to investing is: “All ships rise with a rising tide.” This was not spawned by the markets of 2008 when it was difficult to find shelter within any equity investment. We need to get back to reality. The point is that diversification is a long-term investment strategy. There is systematic risk of equity investing (ships, rising, tide). William Bernstein wrote a nice piece on the subject for CNN Money in April.
Death of Buy and Hold?
Wednesday July 1, 2009
The equity markets made many investors question age-old investment strategies. Many investors that may have believed in “buy and hold” strategies in the past now are lamenting their decision to stay invested through the tough patches in the markets.
This questioning of time-tested strategies is understandable. After all, economically speaking, 2008 is a year to forget. But don’t forget it without learning a lesson. The lessons learned will be different for all of us. When it comes to investing, buy and hold in particular, Morningstar interviewed three investment pros who teach a lesson on buy and hold investing.
John Bogle makes a great point when he says, “…we don’t know what people mean when they say buy and hold.” Just like we will all learn a different lesson from the recent financial crisis, we probably all think of, and utilize, buy and hold strategies in a different manner. Regardless, it is worth watching the brief video interviews regarding the “Three Takes on the So-Called Death of Buy and Hold.”
Mutual Fund Scandal
Thursday June 25, 2009
In just one trading day the Janus Worldwide Fund made 5% when the market was down 2%? On another day, the Old Mutual Fund was up 9% when the market was down slightly? What gives?
Do you remember the mutual fund trading and timing fiasco that was ended in 2003? I remember it too well. Brokers (a team at my former employer was written up frequently in the WSJ and other papers after they were busted) were trading mutual funds after hours.
It doesn't matter how the brokers and their hedge fund clients profited from the trades. It's sufficient to say that we (brokers that is -- and I was a broker, I mean financial advisor, at the time) thought they were on top of their games. We thought they were making money for their clients, building a loyal client base and, in turn, making a great living.
Then, one day, about 10 guys in white shirts and red ties walked in the brokers' office with hand held tape recorders. Their office was directly across the hall from mine. I had a perfect view as the brokers' files were pilfered and incriminating information was gathered.
Fast forwarding six years, settlements for the misdeeds of unscrupulous brokers, hedge fund managers and, in some cases, mutual fund companies, are being paid. Old Mutual Fund and Janus Advisor Worldwide, as I mentioned above, received large sums.
Morningstar has posted a piece on the mutual fund scandal and points out the mutual funds that recently received a windfall from the settlement.
