The Motley Fool took the Massachusetts Pension Reserve to task for firing Legg Mason Inc.'s Bill Miller, along with other managers from top investment firms, and entrusting most of its new cash to a passively managed index fund.
In addition, nearly 90% of high-performing mutual funds have a three-year period in which they have underperformed others, according to the study that was released last week.
Investors do not tend to react wisely to such episodes of poor performance, the Fool said, citing the study; they tend to withdraw their money when a high-performing mutual fund hits a rut, in effect investors continue the practice of buying high and selling low.
Investors should also keep in mind that periods of weakness are generally followed by market outperformance, The Fool said, and the Web site offered three pieces of advice:
* When evaluating a manager, look for a long tenure, long-term outperformance, a consistent strategy in good and bad times, and experience in bear markets.
* Think twice before moving cash out of funds that have disappointed recently but are run by a proven manager.
* Use extra cash to invest now in a fund with a top-notch manager.
Small-Cap Time?
Forbes wondered whether now is the time for investors and analysts to begin investing in small-cap stocks, noting that in the four-week period that ended Aug. 6, the Russell 2,000 rose 10.3%, versus 3.8% for the Dow Jones industrial average and 2.9% for the Standard & Poor's 500.
Small-cap stocks pay back big-time in the aftermath of a downturn, the magazine said. One year after a bear market they gain an average of 41.4%, versus 32.4% for large-cap ones.
Some analysts, citing market indicators and the inherent flexibility of small companies, say small-cap stocks will continue to outperform.
Others are advising their clients that large-cap stocks are still their best investment option.
Strategists at Merrill Lynch & Co. Inc. say the recent strength of the Russell 2,000, which has more than 10% of its shares held short, is partly a result of short covering.
Another reason to be cautious about small-cap stocks: Volatility is on the rise, and that is typically when small-caps trail the large-caps, according to Forbes.
Also, macro-economic conditions still look tough, the magazine noted.
Made Whole
An unusual settlement will allow tens of thousands of investors in auction-rate securities get back 100% of their investment's value, according to Money.
The market for these bond-like investments, which advisers had marketed as being as liquid as cash, froze during the credit crunch, leading New York Attorney General Andrew Cuomo to take legal action against Citigroup Inc., one of the largest issuers of such investment vehicles.
Citi agreed to repurchase securities it sold before Feb. 11 at full value, and it will reimburse retail investors who sold their securities at a discount after the market for them shut down.
About 40,000 Citi customers, whose holdings are worth more than $7 billion, are expected to benefit.
Merrill, acknowledging the Citi settlement, said that it would buy back auction-rate securities at par - a plan that would benefit Merrill customers holding $12 billion of such securities.
Settlements with other investment firms are expected, according to Forbes.
CD Yields Creep Up
As annual yields on certificates of deposit rise, some analysts are calling them an attractive alternative to cash, according to The Wall Street Journal.
The newspapercited rates as high as 4.25% on a one-year CD from Wachovia Corp. and 5% on a five-year CD from Bank of America Corp.'s Countrywide Financial Corp.
The national average is 3.6% for one-year products and 4.16% for five-year products. And the current rates on Treasury notes are 2.3% for one-year products and 3.3% for five-year products, according to the Journal's research.
As long as the CD is under the Federal Deposit Insurance Corp. limit of $100,000, there is no risk to the principal. A bigger concern is avoiding penalty fees for retrieving the money before the CD matures. In that case, investors commonly sell the principal to another investor.
CDs with maturities of up to a year tend to be more attractive because of the uncertainty over whether they will outpace inflation.
Some wealthier investors hedge against inflation with a "laddered" strategy of putting their funds in multiple products with rolling maturity dates.
Ready to Adjust
The New York Times urged investors to rebalance their portfolios, given the market's volatility.
Asset allocation - or the amount invested in stocks versus bonds - "is probably the biggest determinant of the risk and returns you can expect from your portfolio," the paper said.
But with so many variables in the market, rebalancing a portfolio is not nearly as simple as it seems.
The Times offered this advice on rebalancing from various financial planners:
* Do not rebalance only in terms of stocks versus bonds. Consider the balance between small-cap, midcap, and large-cap stocks, and don't forget about domestic versus international.
* Do not wait until an arbitrary date to rebalance. "A better strategy is to rebalance whenever your underlying allocations shift by a certain amount - say, 5%."
* Be careful with a small portfolio. Transaction fees might erode enough value to defeat the purpose of rebalancing.
* Avoid buying more shares of your employer.
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