Fund Blawg

The Utopia fund family in a dramatic move registered with the SEC to liquidate all of it's mutual funds as of December 22nd, 2008. With a -47% YTD return and only $30 million in assets, the Utopia Growth Fund is a not large enough to survive the large wave of redemptions I suspect are triggering the liquidation. The ironic thing about the liquidation is that  on the Utopia website the goal of the Utopia Growth Fund is described a:

• Growth and compounding through consistent absolute total shareholder returns
• Strategically limit downside volatility
• Serve as vehicle to harness the power of your good intentions

Nice sentiment. Too bad they couldn't execute on limiting the "downside".

This type of news will likely be very common in the mutual fund industry as investors vote with their pocketbooks and pull money out of losing mutual funds. The large mutual funds with billions in assets will weather the withdrawals, but smaller funds will be pressured to liquidate or merge with other funds.

The most heartbreaking part of this bear market is the untold number of investor's retirement accounts being decimated. By decimated I mean losses of 40-60%. I have spoken with dozens of investors with 401(k) and IRAs, and the universal comment I receive is "I refuse to open my statements or look at my account online". These investors have accepted the ongoing losses because they believe there is no better choice.

The buy and hold mantra again rears it's ugly head again, "Don't worry the market always goes up in the long-term". And investors who are now down 50-60%, and must now make 100-300% to break even, continue to place their faith in the buy and hold fantasy. Unfortunately for these investors once this bear market is over, it will take five to six years of bull market gains just to break even.

If you a reader of this blog please let me know how you are doing in your retirement account by leaving a comment.

As more investors come to grips with the fact that there will be no quick rebound from this bear market, it's time to see where we are. The chart below (of the S&P 500) shows that from the October 2007 highs through November 2008, that all the gains from 2003-2007 have been erased.

As I have repeated ad nauseum, this is the problem with buy and hold - your hard earned multi-year gains can be wiped out in brutal bear market.

On Monday many of my friends began asking me if the 11% rise in the Dow Jones meant the market had bottomed. Some even suggested now was the time to get back in to the market. I suggested to them that the market was oversold and we were due for a rally. Most importantly I mentioned that the biggest days happen in bear markets. According to this article, nine of the largest point increases for the S&P 500 for example, occurred in the 2000-2002 bear market. As if on cue the market sold off mildly yesterday and tanked today.

The chart shows the market down 9% for the day. The market is not going to go straight up. The financial mess we are in is going to time time to fix. In the meantime the market is focused on the fact that we are in a recession, which means company earnings will slow. Since earnings will slow stock prices have to be taken down to compensate.

As the bear market continues to wipe out mutual fund investors I thought now would be good time to revisit the buy and hold fairy tale. This fairy tale has friends of mine continuing to hold their mutual funds as their retirement savings are devastated. According to the buy and hope crowd, the market goes up in the long term so just hold on. To prove their point they say that over the 80 years the market has gone up and average of 8% annually. This is a meaningless and misleading statistic for most investors and here's why: investors don't invest for 80 years, the long term is maybe 20-25 years for retirement. Given this greatly shortened time horizon losses that take years to recover can prolong the amount of time that must be spent saving for retirement

The reality is that buy and hold is not a strategy; it is based on torturing statistics to show the market in the best light. Take the case of Fidelity Magellan, one of the largest mutual funds in the US. The fund has last 44% year-to-date! The chart below shows what would have happened to a buy and hold investor going to back to 1995.

 A buy and hold investor in Fidelity Magellan has less money today then he did in 1995. So much for buy and hold. And as I pointed out in my last entry on the The Real Bear Market, since 2003 Magellan could not even match the high it made in the year 2000.