November 3, 2007


Dear Reader,

We hope you are doing well.

The market has been trading sideways during the last month. At the moment, the market participants are trying to anticipate if the market is able to hold on to its gains and pick up the upward momentum.

Our next InvestWELL Report will be released on December 6, 2007 .
(following the Labor Report which is generally recognized as a "market mover").

Derek Polcyn,
President

In This Issue:
Investment Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz

Investment Idea

Question:
Is it a good idea to buy actively mutual funds with a high MER (Management Expense Ratio)?

Answer:
No, as a general rule. Numerous studies conducted over the last decade have concluded only 16% of actively managed funds have outperformed the S&P 500 index (more importantly, they only marginally outperformed the index!). There is overwhelming evidence that passively managed funds (indexes with low MERs) outperform actively managed funds (funds with high MERs).

Consider the following:

• The equity markets are very efficient, which means that professional money managers find it very difficult to beat an index consistently
  
  
• Actively managed funds have higher costs (by 2% on average)
  
• Passively managed funds allow investors to postpone taxes

Quiz

When could you consider buying an actively managed fund (with high MER), despite evidence that such funds under perform an index?

A) The fund has done really well recently
B) Benefits of diversification by management style
C) You like their advertising campaign
D) Your cousin believes it is a sure winner

Answer to the Quiz at the bottom of the newsletter

Our Results (Cumulative %)

Investment Strategy – MEMBER SECTION

InvestWELL Picks is handling the recent market volatility (as defined by S&P 500 index. ) Over the last month, InvestWELL Picks has declined much less than the general market.

Chart 1.

Market Highlights

• During the last month, the US equity market has declined by about 5% (Chart 2 & 3). The market will likely attempt another test of the recent high and we are not sure if the test will be successful.
  
  

Charts 2 & 3. S&P 500: 3 Years and Last Month

Charts courtesy of StockCharts.com

• During the last month, the Canadian market has outperformed its US counterpart mostly on the general strength of the Canadian economy (Charts 2 & 3).

Charts 4 & 5. TSX Canada: 3 Years and Last Month

Charts courtesy of StockCharts.com

• Last month, the US economy gained 166K jobs while the unemployment rate stayed at 4.7%. The relatively strong Labor Report did not help the equity markets, which did not gain back after the big losses in the previous day.
  
  
• Last month, the Canadian economy added 63K new jobs while the unemployment rate dropped to 5.8%, the lowest in the last 33 years. The Canadian economy appears to be firing on all cylinders despite troubles south of the border
  
  
• The US dollar fell to a record against the euro and dropped to the weakest since 1981 versus the pound on concerns that deepening credit-market losses will prompt the Federal Reserve to reduce interest rates a third time this year
  
  
• The Canadian dollar is doing really well and it is trading at $1.07 (U.S.) mostly due to strong economic data vis-à-vis its southern neighbor. While that's good news for Canadians who are planning to travel to the United States this holiday season, it will likely mean more pain for manufacturers, exporters and the tourist industry in Canada.
  
  

Opportunities and Risks – MEMBER SECTION

Behavioral Finance Indicators (see explanation)

Here is a direct quote from the Behavioral Section in last month's Member newsletter:
"Overall, the market's technical picture has weakened.  We believe the market will be unable to continue moving up in the next few weeks."  Our prediction was correct; the market was not able to advance. 

MEMBER SECTION

Charts 6 - 8: Advancing/Declining Line, AAII and Equity Put/Call Ratio








Charts courtesy of StockCharts.com and DecisionPoint.com

Answer to the Quiz

B is correct.
If the great majority of your portfolio is already invested in low cost, passively managed instruments, one could make the argument for potential benefits of diversification by management style.

Thank you for reading InvestWELL Report. This is a non-member version of InvestWELL Report.

Please sign up for our membership to receive the member version of the InvestWELL Report.

InvestWELLFinancial.com

Copyright
The contents of this publication are the property of InvestWELL Financial and may not be summarized, reproduced, or rebroadcast in any fashion without our written permission.

Disclaimer
InvestWELL Financial’s first priority, as a provider of independent and unbiased financial information, is to educate our clients. Not only do we provide practical information about securities, but we also coach our clients to become successful independent investors. As such, InvestWELL Financial does not assume any responsibility whatsoever for the use of any information from the website or related publications. Although all sources of information are vetted and the information is believed to be reliable, it is not provided as investment advice. Past performance is not an indicator of future performance in securities. Each portfolio must be balanced and based on personal circumstances. High-risk investment decisions should be made in consultation with an investment professional.

InvestWELL receives no commission or benefit of any kind from the companies whose securities InvestWELL Financial showcases. We do not necessarily own shares in the showcased securities, but if we do, these shares would only form a very small part of widely-held and publicly distributed companies. There is no intention whatsoever of profiting in a manner where the price-impact of trading or holding of a security might arise. The website and related publications of InvestWELL Financial are intended to only be used for educational purposes.