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May, 2008


Here and elsewhere if one were to read most of what is written about mutual fund investing, the guidance would at some point likely include the truism that one should not buy hot mutual funds. The reason is that one's timing is seldom going to be nimble enough, so if he or she buys, for example, health care funds (or precious metals, technology, third world markets, financial sector funds, etc.) right after they have been substantially up for a year or so, chances are they are then just about to dip down, wiping out not only any profits made but a lot of principal as well.

What is usually recommended instead is to carefully choose a few well run low or no load (low or no commission), low fee growth and income funds and stick with those, through the years investing in them over and over, ideally in roughly equal amounts and intervals (i.e. on a dollar-cost-average basis). This way, one is likely to do at least as well as and perhaps somewhat better than the major market averages and with a little less risk.

But there is one, and only one that I know of, viable exception to this kind of advice. If one had invested in Janet Brown's "NoLoad Fund*X" newsletter and followed its hot mutual fund buy and sell advice since 1997 (when she took over the underlying financial advice company), one would then have had the satisfaction of seeing those investments beat the market every year since.

Indeed, as the investment newsletter company has been around since mid-1980, its record can be tracked even longer. Its class 3 recommendations (those for a relatively low risk equity portfolio) have had an annualized return of 17% since then. This compares quite favorably with, for instance, the S & P 500 Index which has returned a roughly 10% annualized rate in the same time frame. Over a 30-year period, a $10,000 initial no load funds investment with a tax-deferred 10% annualized return would become $174,500. Under the same conditions, a 17% annualized return would produce a final nest egg of $1,110,000. (As always, past performance is no assurance of future returns.)

Over the decade ending the first of April, 2008, "NoLoad Fund*X" has been the top performing mutual fund advice newsletter among all those surveyed by the "Hulbert Financial Digest," which analyses and rates investment newsletters.

This newsletter's approach involves a fairly unsophisticated ranking among 1300 or so mutual funds and exchange traded funds (ETFs), based on short-term performance. Janet Brown suggests people simply buy those in a preferred risk category (such as class 3) that have done best lately and sell those that no longer measure up to her high performance criteria. She gains some edge over the competition by sticking with no load mutual funds, so there is not a drag on returns from commissions being taken out.

The newsletter comes out twice a month, and recommendations are to be followed upon receipt. This is not so good, then, as a long-term investment strategy, but rather does well with the advances of some mutual funds, relative to the rest of the pack, on a several month average hold basis. So, if following this newsletter's official portfolio (class 3) advice, investments mainly within tax-deferred accounts would do best. It is also suggested that a discount broker be used for buying and selling the mutual funds or ETFs, to keep steeper commissions from lowering overall returns.

Some investors might be turned off by the need to stay on top of mutual fund trades on a regular basis, the requirement to keep track of multiple 1099 forms for regular accounts, or the fact that there are often fees assessed by the mutual fund companies for short-term trading. For those with the patience to deal with these hassles, though, and with plenty of tax deferred funds available for purchases, "NoLoad Fund*X" may be just what an ailing portfolio's investment doctor would have ordered.

Currently it costs $179 a year ($269 for two years) if one wishes a mailed out hardcopy plus online access. It may well be worth every penny. (Online-access-only subscriptions go for $149 a year or $229 for two years.)

Primary Source: She Only Buys What's Hot. Elizabeth Ody in Kiplinger's Personal Finance, Vol. 62, No. 6, pages 44-46; June, 2008.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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