When Do You Sell Your Mutual Fund?

I never recommend managed mutual funds for several reasons, including high cost and their too-often inability to emulate indexes. Moreover, managements change and you never know who really is overlooking your assets.

                       

What if the fund is not doing well? That does not mean an automatic sale. Market conditions may be the cause and not management inability.

                       

The major consideration should be fund cost because that is the only factor you can truly control. All other factors are well beyond your possible knowledge. Cost is a huge factor in fund success. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Credit Rating Agency Accuracy

                       

Credit rating agencies are generally accurate but the divisions that rated sub-prime mortgages were certainly not up to par at the major agencies.

                       

One way to solve the lack of any problems we may have had with credit ratings in the past, is to allow competition among such services.

                       

Why not allow any company who feels qualified to register as a ratings analyst? Today, a small handful has a government monopoly.

                   

If a company can show the Securities and Exchange Commission that it has qualified analysts and capability to evaluate bonds and other securities, why not have a license?

                       

Another consideration: Do credit rating companies have First Amendment free speech immunity? Courts have ruled they have but plaintiff lawyers are always on the prowl. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Why Buy Managed Mutual Funds?

 I have always commented that indexed mutual funds or exchange traded funds ( ETFs), are better than managed funds. They usually outperform them, and at lower cost. Moreover, the lower the fund cost, the more return an investor will get over the years.

                                       

This question also will come up when a managed mutual fund you may have gets merged into another. These mergers are usually done for either or both of two reasons. To get economy of scale. Or, more often, to hide losing records. In most instances, index funds or exchange traded funds are always a better investment choice. 

Also, don’t attempt to trade managed funds on relatively short term performance. Besides, their internal managements generally change constantly. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Duration Principles Can Apply to Stocks?

I’m repeating last month’s lesson about duration principle investing, as it may be applied to stocks.(See yesterday's blog on bonds.)

I have in the past discussed important rules behind bond duration, which include the need to reinvest the periodic dividends of funds in which the bonds are held.

There is a somewhat similar principle with stocks that have an assured high income.

REITs are one example: If high periodic returns are reinvested in the same entity, you get a similar effect. Such purchases help mitigate risk and reduce average costs of long-term holdings; hit-and-miss market-timing is avoided. (See the Earl J.Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Repeating a Bond Investment Lesson

It’s important to repeat this lesson about bond investing because so much information being offered about is so misleading.

Too many financial “experts” flunk bond market basics. They constantly have an unwarranted fear of the adverse effects of higher interest rates on individual bond prices and values. 

Fact: Very few investors buy outright, individual bonds of any maturity, They invest, instead, in convenient, low- cost, fully diversified, mutual funds or ETFs.Therefore, the bulk of so-called expert comments on individual bond purchases and holdings don’t apply.

Fact: For the most part, bond fund owners reinvest their periodic dividends.This is impractical and usually impossible for individual bond buyers to accomplish.

Fact: While it’s true that bond prices fall when interest rates rise, and bond prices rise as interest rates fall, these effects can be modified by duration and reinvestment principles. Duration explains why shorter-term bonds are not affected as much by interest rate movements as are longer-term bonds.

Fact: More important: Bond mutual fund investors who are aware of duration principles need not be hurt over the long term by interest rate moves; they can actually prosper when interest rates go up, with duration rule usage. .

Fact: A bond holder is a lender. The higher interest rates go, the better off that lender is, provided he or she uses duration and reinvestment principles. And sticks to a plan of how long the bond fund is to be kept.

Note: Bond funds usually list their duration numbers. Look for, or ask if they’re available for funds you seek.If not, approximate the figure to an extent by assuming that the shorter-term the bond portfolio maturity, the smaller the fund’s average duration.

The reinvestment solution: The bond investor who reinvests dividends then holds the key to better performance. He should hold the fund longer than the stated duration period of that fund. If his intended investment period is more than 4 years, for example, it will be profitable to hold a bond fund with duration of at least 4 years. Long-term bond fund investors are always ahead in this game.

Fact: Experts love to bring up the question of credit defaults when evaluating bonds. But here again, pundits generally generate more bluster than thought; the defaults rate is always built into the market price of a well- diversified fund. So higher defaults are offset by commensurate higher rates.

All these facts ruin arguments pundits have concerning values of individually-bought, non-in-kind, non- reinvested earnings, that apply to rates or interest-effected changes and looming inflation. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Trading Taxes as a Budgetary Solution?

Periodically, liberal politicians and powerful unions try to tax financial transactions whenever they can, and discourage what they call “excess speculation.” The estimated tax revenue could conceivably bring the government about $200 billion or more, over five years.

                       

Similar moves are often dreamed up in the U.K. and Europe from time to time, by their left-thinking politicians.

                       

The consequences of such taxes on economies are the problem. Securities trading is integral to economics. Such taxes would therefore be indirectly felt by everyone.

                       

All this hides the fact that speculation in a capitalistic society does not

cause problems. Market action merely reflects pricing, something politicians of never comprehend. Capitalism’s presence may appear to help boost rising prices, but works the other way just as easily, when prices fall. Taxes simply help diminish proper market facility. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Timing The Buy Low/ Sell High Strategy

The automatic buy low/sell high strategy is just one of the multitude I have studied, and is especially popular among financial reporters and columnists. Like other strategies, it has pros and cons.

           

Moreover, the procedure is not as simple to use as it first appears, particularly when applied by average investors, who usually have difficulty in its implementation.

           

Studies do show that buy low/sell high strategy may return more than haphazard, in-and-out market trading, but only if it can be disciplined. That effort can be a questionable undertaking.

The natural tendency for anyone with a trading account is to stay attuned to the market and constantly, actively, overreact to its influences. Few investors, including professionals, can master that discipline, in an attempt to determine highs and lows, amidst constant chatter.

           

The main disadvantage: Many of this strategy’s adherents are not disciplined. They wind up attempting to time what they feel are appropriate buying and selling points. They thereby become common victims.

           

The strategy can work to an extent, if used as part of a strict asset allocation program. If, for example, under a 60/40 equity/bond program you periodically adjusted by selling the portion that rose and then buying what fell, you would have strategic implementation. Doing so by precise formula would be your discipline.

           

However, this strategy makes it difficult to observe duration principles on bond holdings. There are times when the proportion of long-term, intermediate and short-term bonds have to be arranged to meet investor cash needs, and duration becomes a factor.

           

This rearrangement of assets can also cause a good deal of taxable trades in accounts that are not tax-deferred, such as retirement. Selling for asset adjustment can make taxable events, and have to be kept to a minimum.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)