There has been much debate over the past decade about the value proposition of actively-managed mutual funds to the average investor. The potential advantage which you’re really paying for with mutual funds is the possibility of choosing a brilliant portfolio manager who can beat their benchmark year after year.

I’ll only break out one statistic here among the many which convey the same unfortunate message about the mutual fund industry: six out of ten actively managed stock funds underperformed their indices in 2008, primarily due to fees, according to the Center for Institutional Investment Management at the University of Albany.

I’ve gotta say—I was a bit surprised by the opening life of Evan Simonoff’s column in the October Financial Advisor magazine. He said “Who among us (referring to the financial advisor community) really takes this 60% rally in equity prices seriously.” He then goes on to say it's “remarkable” how many observers are convinced this rebound is for real.

Evan’s column, The Long View, which I read most months, usually provides careful analysis to its arguments. However, this month I was a bit disappointed. Simonoff cites Liz Ann Sonders throughout the article who, it turns out, is actually pretty optimistic about the big market bounce. I didn’t find much if any of the solid data I would expect from an article which looks to support an overall bearish sentiment amongst advisors. Based on what I’ve been hearing at recent financial advisor conferences around New York City, the sentiment is anything but bearish. So let’s take a look at why some advisors might actually take this rally in equity prices seriously.

The craze of exchange-traded funds (ETFs) which employ leverage (the use of borrowed capital to increase the potential return of an investment) has been on a tear over the past year.* It makes sense that speculative investors would toy around with such vehicles given the extreme market volatility we’ve been experiencing of late. Combine that with the high level of conviction certain day traders have about which direction the markets will move in and when, and you can fully appreciate why the trading volume on these ETFs is so high.

Leveraged ‘inverse’ ETFs are part of this craze as well, allowing investors to take bets against sectors of the market which they expect to decline. Just to be clear, these leveraged ETFs are designed principally for experienced investors who engage in market timing. They wouldn’t generally be suitable for an inexperienced investor or somebody who didn’t fully understand the characteristics, including the risks of the product. The financial advisor channel uses leveraged ETFs as well. In my practice their primary use is as a hedging tool to lock in gains or limit losses on certain positions at certain times. The function which they do not serve, and most advisors will agree on this, is as core portfolio holdings. More on that below:

Many of my clients and readers understand my general preference for exchange-traded funds (ETFs) over mutual funds. It isn’t that I doubt the ability of any active mutual fund managers to outperform their benchmarks—plenty of them do. It’s just that if I have to pick an overall methodology to follow in my practice, I’d rather stick to the low-cost, transparent nature of ETF investing over buying actively-managed mutual funds. Back when I wrote my book in mid-2007, ETFs were graduating quickly from speculative tools to core holdings, a trend that really started in 2005. Nowadays, we can see in the constant release of fund flow data by companies like TrimTabs and Barclays (BCS) that ETF investing is growing at a rapid pace while mutual fund outflows have been consistently heavy. Part of that is obviously due to investors sidelined by the recession, but the other part is the financial advisor channel quickly catching onto the benefits of ETF investing.

Each year across the street from my office Capital Link hosts the Closed-End Fund and Global ETF Forum. It’s always fascinating to see how much this conference grows year after year. When I went for the first time in 2005 it was practically a one-room discussion between 40 or 50 industry guys. This year it attracted 722 people, a confirmation of this conference as an important destination to discuss various ETF and closed-end fund trends.

“45% of retirees aged 55-75 have either not calculated how long their assets are anticipated to last during their retirement years or they have never given the issue any thought at all.” (Financial Advisor Magazine: June, 2009).

This to me is a startling statistic. Almost half of the surveyed population doesn’t plan for the years when they are no longer working? Is retiring one day really not on people’s minds? Maybe it’s not given how poorly the stock market has performed over the past decade. Even so, the time to think about retirement is well before it starts, not once you’ve already decided to permanently quit the workforce.

Have you ever pondered the question… does my financial advisor practice what he/she preaches? Do they utilize the same investment products and strategies which they suggest to everyone else? Do they follow the same asset allocation guidelines which they are recommending to others? I think you’ll find the results of my study quite intriguing. Over the past month I’ve spoken with a random handful of financial professionals whom I’ve met over the years to ask them how they invest personally and plan for retirement:

First, I spoke with Josh Cumrine of Butcher Hansen, LLC. Josh told me that he aims to save 15% of his gross income each year. “I invest 2 of that 15% in my 401k” he tells me. “And I take a very conservative approach by investing in all cash and money market instruments.” “Another 3 of that 15% is invested in whole life insurance policies.” While Josh told me he does have some money in slightly more volatile market investments such as bonds, for the most part he invests in ultra-conservative vehicles such as money markets, credit unions and savings accounts.

I had lunch over the weekend with a fellow money manager specializing in municipal bonds. Because of the growing volume of municipal bond business, I like to gather opinions about where the best opportunities are right now in this space.

It’s no secret that the current yield spread between treasuries and municipal bonds is totally out of whack. In case you don’t know the historical norms, here is some background: Because municipal bonds purchased by state residents are often free of state and federal taxes, they typically yield less interest to investors than treasury securities with comparable maturities. Lately, treasuries yields have been abysmal in light of the recession. The ‘flight to safety’ play has treasury prices sky high and yields very low. Similarly, the highest rated municipal bonds (AAA) are paying much less interest than municipals bonds in the A and BBB space.

I did an interview over the weekend for a Columbia graduate student seeking both professional and participant commentary about the state of the 401k industry. He wasn’t expecting to hear a whole lot of positive considering the recessionary environment, but he genuinely wanted to know how attitudes and advice regarding 401k investing had changed. He even asked: “had I learned (as an advisor) any lessons from the recent and precipitous market declines?” The answer to that question is a resounding yes and I’d like to share what has changed in my practice and comment on the realities which have surfaced in the planning profession in general as a product of the recession.

One process which has certainly evolved since the onset of the recession is our due diligence when it comes to assessing the risk of various investment products. Periods of intense volatility remind financial advisors of how quickly years of financial gain can be erased. The S&P 500 declined roughly 50% in the 10-month period beginning in May of 2008 and ending in early March, 2009. It took nearly five years for the S&P 500 to climb to those highs from the 2003 lows. In light of this enhanced volatility, many advisors are rethinking what they are getting their clients into when they buy shares of certain stocks, bonds and funds. For example, many advisors rely on rating agencies when it comes to picking bonds for clients. At this point we know that the rating agency business is riddled with questionable behavior, in part due to their compensation structure in which the agencies get paid by the companies which they rate. Rating agencies are also relied upon to convey the financial solvency of insurance companies. Financial advisors review these ratings because they help determine the claims and benefit paying ability of the insurers. If these ratings are inaccurate they can result in bond defaults for clients, lost insurance premiums and overall higher levels of anxiety for everyone.

Even though the stock market has been showing signs of stability over the past few weeks, the recession is ongoing and plenty of investors may remain paralyzed and shocked over the events of the past six months. Some maintain the attitude that stocks and even bonds are too volatile and sticking with cash investments is the best idea at this point. Others believe the market is headed lower in the short-run so it makes sense financially to keep plenty of cash on hand. Regardless of the reasons, here are some tips for cash-heavy investors who want to stay relatively safe and perhaps earn a little interest on their money.

First, try to keep a maximum of $100,000 with each bank. You may have heard that the FDIC raised its coverage limit to $250,000 back in October in response to bank failures and fears of depression-style bank runs. They did and will continue to keep the coverage at $250,000 until December 31st of this year, at which point it will revert back to $100,000. Only for IRA accounts will the increased coverage be maintained. One way to skirt around this rule if you truly don’t feel like having accounts with multiple banks is by having various registrations. For example, joint accounts are treated differently from individual accounts in the eyes of the FDIC. If you’re married, you could have up to $250,000 (until December 31st) in a joint account and another $250,000 in individual accounts. If you have IRA accounts with your bank (I don’t recommend investing for retirement through a bank but in case you do) those accounts are treated separately and also covered up to $250,000 right now.

The recent recession is somewhat unique in that the credit markets have been dragged through the mud with the equity markets. Bondholders, generally considered to be in a safer position than stockholders, aren’t feeling so at ease. Over the past year bonds across the risk spectrum have declined in price amidst speculation that default rates could skyrocket in 2009 and 2010 to levels unseen since the Depression. As a result, investors with a few years on their time horizon may have a real opportunity right now if they pick and choose their investments carefully. Bond prices are down overall and yields are relatively high. The potential payoff could be even greater if the default rates remain contained and the credit spreads start to narrow.

The percentage of expected corporate bond defaults as implied by current credit spreads is currently over 20%.* Meanwhile, several experts have come out in March revising their expected corporate bond default rates below 15%.** Part of that can be explained by improvements in cash flow volatility and consumer sentiment, both of which are factors in computing credit spreads. Even if an investor remains skeptical of unusually high yielding bonds, there may be other bond investments worth looking at further down the risk spectrum.

Over the past few months I’ve fielded more questions than usual regarding overhauling 401k plans and switching providers outright. The concerns have come from employees and business owners who have found that all or most of the investments in their 401k plan correlate too closely with the major stock and bond indexes. Participants are having a hard time finding ‘hiding spots’ during the turmoil. At a time when most of the major indexes are suffering badly, workers are seeking access to alternative asset classes such as gold and special minerals, energy, fixed accounts and even inverse or ‘bear market’ investments. So what makes a 401k plan good or bad? What can you do to get a better plan in the door at your company?

There are five primary areas in which a 401k plan can either shine or fall short. They are: cost, investments, service, plan design, and fiduciary responsibility. The easiest conversation I have with my 401k clients is regarding cost. Analyzing the expense ratio of investments and related wrap fees, sub-transfer agent fees and 12b1s is always an interesting exercise. A surprising number of investors think they pay little or no money in fees and expenses and ultimately receive 99% or more of their investment returns. What an expensive misunderstanding! According to a recent case study by pension fiduciary Matthew Hutcheson, the average expenses of a 401k plan fall in the neighborhood of 3%, perhaps closer to 4% if you include insurance company 401k platforms which are fairly common.*

A recent InvestmentNews survey finds that the majority of money managers in the US don’t think Obama’s economic recovery plan will achieve its stated goal. Frankly, I’ve yet to hear any one plan I’m jumping for joy over. In my understanding of Obama’s plan, the economy would be stimulated using a bottom-up strategy rather than the Republican favored, top-down strategy of across-the-board tax cuts.

Obama believes creating jobs through state-government mandated infrastructure projects will jumpstart consumer spending and pull the economy out of any further immediate danger. It’s nearly impossible to know if this will work. And if it does, will it be a temporary, shot-in-the-arm stimulus which ultimately fails due to excessive debt burdens and mounting inflation? I don’t think across the board tax cuts would work any better if we’re truly aiming to stimulate the economy and get more dollars circulating. Politics will undoubtedly interfere with the Obama plan, and marginal tax rates will ultimately increase to balance future budgets and service debt.

Some of my clients have baulked at the idea of making a contribution to their traditional or Roth IRA accounts for 2008 before the April 15th deadline. The idea of pumping more money into stock and bond investments in the midst of this ‘economic storm’ is an eerie proposition for some. I’d like to remind anybody still pondering their IRA decisions for 2008 about a few things:

First, we make IRA contributions primarily for the tax benefits. If you’re convinced that the market may still shed some value in the near future, you can always put your contribution into cash or a money market and move it into different asset classes when you feel ready to do so. If you’re within the income limits, making a deductible contribution of $5,000 or $6,000 can greatly cut your tax bill for the year. It could also possibly lower your income enough to qualify you for student loan deductions, a stimulus check, etc. These things are hard to anticipate but can work to your advantage.

Twelve months ago, not many people expected 2008 to end in an economic downturn so severe that it would take many of the great 20th century financial institutions with it. Most of us had a basic understanding that a bubble was forming in the housing market, fueled by low interest rates and other pro-growth fiscal and monetary policies. However, the high level of risk within the financial sector was difficult for most investors to detect due to the inherent complexity of securitized assets.

Like many things in life which seem too good to be true, people focus on the benefits without giving adequate consideration to the risks. Why rock the boat, right? Well, as the financial bubble continues to burst and scandals like Bernie Madoff's come to light, investors are realizing that due diligence is more important than ever. This applies not only in a broad sense as a wake-up call for Wall Street and its regulators, but in our personal financial lives. 2009 is a good time to re-evaluate investment objectives, investment assumptions, and liquidity needs. In today's column I'd like to consider whether cherished portfolio strategies such as diversification, asset rebalancing, and dollar-cost averaging should remain as fundamental to our investment philosophy as they were a decade ago. I'd also like to review some of the 2009 retirement plan contribution limits. Even if your investment choices become more conservative this year, taking advantage of tax-deferred investment accounts can be important to your longer-term financial success.

The student loan industry is a giant scam if you ask me. Parents and students alike don’t realize the slanted arrangement they are about to take on when applying for these loans. Society places such a strong emphasis on education (for good reason) that the education industry and especially the lenders behind it stand to benefit tremendously. It’s a shame that so many of these organizations view a young person’s desire to better educate themselves as an opportunity to rip them off, but I can’t say I’m surprised, not after listening to the news for the past six months. The only way to come out on top and not cost oneself a fortune in interest and penalties over the years is to never miss payments on student loans and, when possible, pay considerably more than the minimums. This can be hard to do at a time when jobs are scarce and higher education is wildly expensive.

At the root of the problem are big banks which have lobbied Congress successfully to remove bankruptcy protection on both federal and private loans. What does that mean? For starters, lenders can charge steep penalties on late and missed payments with the reassurance that they’ll eventually get their money back, even if the borrower files for bankruptcy. The lenders can also be more amenable to deferment and forbearance options for students who can’t make payments immediately upon graduation. This makes the lenders look like good guys who offer extended grace periods but the reality is quite the opposite. Deferring your loans is perhaps the worst thing a borrower can do for their future. All the interest gets tacked on to the back of the loan most likely with added penalties and fees. Deferring a private loan is like paying the minimum on a maxed out credit card: ultimately the lender wins. Hopefully Obama can do something sooner than later about this system which cripples young workers and saddles them with debt.

As you may have imagined, the past few months have been stressful not just for individual investors but for financial advisors as well. Many advisors get paid a percentage of the assets they manage so when asset prices cheapen, as they have recently, it indicates pay cuts for advisors, portfolio managers, insurance professionals, etc. One change which has been widely commented on in industry publications lately is the movement of assets away from large wire house firms such as Merrill Lynch and Smith Barney into smaller, independently owned advisory firms.* This move is not strictly the result of clients seeking a better relationship with their advisors. It’s also the result of advisors working at firms which have been plagued by the credit crisis looking for a change of scenery.

From my recent discussions with clients and friends who maintain accounts with both wire house brokers and independent firms, a common understanding seems to be that smaller accounts, particularly those valued between $50,000 and $250,000 get very little attention from wire house advisors. This sentiment was confirmed by a friend of mine who recently left his post at a big firm to go out on his own. He explained to me that the majority of sales training he went through was oriented towards going after high net-worth individuals and institutional investors. Along similar lines, I have a client who maintains roughly $200,000 with a wire house broker who told me that he didn’t receive one personal e-mail or mailing from his advisor during 2008; just mass e-mails which provided generic market updates. I would argue these guys aren’t just missing the point about what they actually get paid to do, but they’re also risking an obvious source of future business.

Volatility is a very important discussion to have with clients before they invest. In many cases clients will choose bonds over stocks because of a perceived lower level of volatility found there. Historically, that’s a fair assumption--rarely if ever in the past 20 years has a portfolio of municipal bonds represented a similar level of risk to stocks. People are also taught to buy bonds for the yield and to not pay close attention to daily fluctuations in price. Well, like a lot of other things, 2008 has changed the rules. Bond volatility combined with mark-to-market accounting rules has helped crush the daily trading prices of many bonds. It has also caused a phenomenon of highly rated bonds offering competitive yields. So, does this present an opportunity for investors? Here are a few things to know:

First, many industry experts and financial planners whom I’ve spoken with believe some of the best bond market opportunities are in the municipal markets. Municipal bonds generally pay a lower rate of interest than corporate bonds in exchange for better safety. Unlike corporate issues which rely on consumer spending and other variables, municipals generate income through more reliable tax revenues, tolls and other consistent sources of revenue. An added benefit is that many municipal bond issues are exempt from federal and/or state income taxes—although not all, so you’ll want to contact your financial and/or tax professional for confirmation.

Now that Hank Paulson is a lame duck, and we’ve seen the majority of his contributions as Treasury Secretary, we can begin to assess whether he has been handling the unfolding economic downturn effectively, or as some might suggest, made it worse. As is usually the case with economic policy, we can rarely determine with certainty what was a ‘correct move’ for several months if not years afterward. My opinion is that Paulson has done an adequate job so far in terms of avoiding a deeper recession or depression, but has made some questionable moves and has been less than sensitive to the needs of Wall Street.

First things first: many would agree this recession was brought on by a housing bubble which has left millions of Americans in foreclosure who were either encouraged in some way to become a homeowner (when they weren’t quite ready) or straight up duped by a bank or other broker into taking on a confusing mortgage product which would presumably be beneficial in the long-run. So, it would seem to me that preventing future foreclosures would be an equally important priority, especially from a moral perspective, as protecting the banks which ultimately take on the mortgage losses.

Whether or not you liked George Bush, his budgets over the past four years have consistently called for more tax cuts and extensions for expiring tax provisions which would otherwise hike taxes. Last year, Bush extended the lower marginal tax rates on ordinary income and the preferential rates on capital gains and dividend income. The goal of these tax cuts was to raise individual incomes, add jobs to the economy and lower unemployment. Well, no luck so far on reaching those goals. On Friday we learned of 240,000 more job losses last month and a national unemployment rate of 6.5%. So now the question becomes, what can we expect from President elect Obama? Lots of people on Wall Street are scared of a scenario in which Obama raises taxes shortly after getting into office presumably in the middle of a recession. Herbert Hoover did the same thing in the early 1930’s. It led to the Great Depression. Are we in a similar predicament? What can we expect over the next four years from Barack Obama in terms of taxes?

First, it should be noted that in light of the recent economic downturn, it’s possible that Obama’s tax plans will get deferred for a year or two. Because his overall plans are to raise taxes on higher-income earners and lower taxes for the middle and lower-middle classes, his tax plans aren’t viewed as a ‘stimulus.’ And because of the recent stock market declines, Obama and his advisors might pay more attention to monetary policy and new legislation to stimulate growth over his longer-term economic agenda. Now, if you asked him, he would tell you that the large majority of workers in this country will pay lower taxes under his administration, not more. His tax increases would hit hardest those with earnings over $200,000, and those businesses which have pass-through taxation and therefore would fall into this category as well. Because over 95% of Americans would actually have their taxes reduced under his plan, he views it as a ‘net tax cut’ to Americans. The effects are debatable but that fact I believe to be true.

Last week Nancy Pelosi announced that the completed version of the Economic Stabilization Act of 2008 is now available on the House of Representatives website. I spent a few hours reading through the bill and would like to highlight what I think are the most important parts. What was immediately clear from my review was that the bill sends us into a new period of financial regulation after a decade of deregulation and leverage. As most of you may already know, the bill was passed late last week in both houses and was signed into law by the President. At this point, considering the market turmoil is worse than it was before the bill passed, we wait to see if these new provisions will be successful in the way of instilling confidence to a market system which by most measures appears nearly broken.

Perhaps the most fundamental aspect of this bill is the establishment of the Troubled Assets Relief Program. This is the infamous ‘$700 billion dollars’ which may ultimately be used to buy distressed assets off the balance sheets of various financial institutions. It was released today that Neel Kashkari, a former Goldman executive will be heading up TARP. The bill contains three main provisions which I’ll dive into now: