Rebound Of The Losers

The WSJ featured an article titled “Rebound of the Losers,” which focused on well-known mutual funds that got clobbered in last year’s market meltdown.

Much of the discussion centers on how fund managers misread the market and stayed the course, which turned out devastating for those investors who hung on for the ride.

Of course, since the end of last year, many have rebounded along with the recent market recovery. The featured chart about the comeback kids says it all:


[Click chart to enlarge]

Hopefully, you did not have any part of your portfolio invested in these funds. The 2008 losses were devastating reaching up to 55% for LMVTX.

The much hyped rebound of 2009 wasn’t really that impressive if you consider that from 1/1/2009 to 3/9/2009 the S&P; 500 lost another 25% before the comeback started.

This is why the above funds have not even come close to making up their losses. The math is simple. Say, you had invested $100k in a fund that lost 50% last year, which brings your balance down to $50k. This year, the fund “roars” back and gains 24% within the first 6 months, which brings your balance back up to $62k.

To make up all losses, you’re still $38k short. Translated that means, you have to gain another 61% (on $62k) just to get back to your break even point.

I don’t know about you, but that does not leave me with the warm fuzzies. The early rebound out of a bear market bottom (if in fact this was the bottom) represents the easy part. Expecting that another 61% growth will happen just as quickly is being unrealistic.

If you are in this situation, the most important thing for you to do is not to do it again. The economic landscape does not warrant prices to race straight north.

Odds are that this bottom of March 9 will be tested again or even taken out. Be prepared by bailing out of your holdings via implementation of a predetermined sell stop discipline. As a reader of this blog, you do have a sell stop discipline, don’t you?

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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