If Nathan Thurm was an equity strategist that is probably what he would say.My prediction for the S&P 500 for year end 2007 was 1350-1375. I was off by a couple of weeks. The importance of this is of course nil. The market could bottom out a few months from now at 1100 or the bottom could have been yesterday, either way Jan 16 will not be meaningful or memorable, its just a date.
I was struck by how many comments there were in response to my crack about not drinking soda. To my perhaps disjointed way of thinking it brings up a point of balance in our lives. It is natural for people to derive stress from their stock investments. One of the themes to my writing is that you should train yourself remove emotion from the equation.
Someone who takes the time to read stock market blogs, like you, is closer to their portfolio than most folks. One hand this could mean you are more in tune with the cyclical nature of the stock market so managing emotions is easier but on the other hand you see the ups and downs of your balance more frequently you might be more prone to emotion.
If you have been reading this site for a while you have hopefully noticed that my mood is not impacted by the stock market. As opposed to what they say on TV a down day in the market is not terrible it just is. I don't sweat bear markets because they are a normal part of the cycle, we know they will come. As an investment manager I don't sweat lagging the market. Part of the job, assuming you aren't the single dumbest participant, is that there will be years where you beat the market and years where you lag. I know there will be years I lag so there is no point in stressing out about it.
If you are having trouble, remember there is more to life than watching your account tick up and down. Hopefully you can train yourself to remove emotion from what you do but if you can't you should either spend less time on your portfolio (and more time exercising, balance right?) or make some strategic changes.
One idea for a low impact portfolio is to put some in the PowerShares BuyWrite ETF (PBP), put some in the Merger Fund (MERFX), buy a foreign dividend ETF, buy an absolute return or managed futures fund and do something with your fixed income along the lines of Nassim Nicolas Taleb's idea of owning a diversified basket of foreign short term debt (no percentages given so we can keep it compliant).
If you need to go that route to keep your sanity or health just know the drawback which is you will lag big bull markets (which are guaranteed to come back at some point) and you will probably need to save more than you are saving now.
18 comments:
Well, the part about knowing the ups and downs is pretty true. Didn't Ken Fisher say the a down is about 10 times more emotional than an equally sized up? Fisher, like Murphy, may have be an optimist.
Anyway, along the lines of of a bit of stabilization, I would like to go back to the double shorts. At one point, you mention 2.5% (and got heckled a lot as I recall) and then later mentioned you had increased the position. That got me to thinking about what might be too big a bet. Would you consider 10% too big a bet, for example? That would mean, I miss 20% of the down and only get 80% of the up. Or, maybe some combination of the short and ultra short ETF's.
I think that does fit into the more stable portfolio example.
Rick Caird
The sort of mental accounting of feeling losses more seems to be universal.
Using double short funds is not that simple. What I mean is that 10% into a double short fund, yes, initially hedges 20% (give or take) but if the market goes down that position will grow relative to the rest of the portfolio. Going 10% all at once is outside my comfort zone i like the combo of some double short, some cash and maybe generally lower vol in the names held.
My goal in adding some double short in the manner i did (and I may do more) was to take out a little vol at what I felt was the beginning of the end of the cycle. fortunately it has worked exactly as hoped for.
down zero is not realistic, i am trying to be down less.
Roger, I really think you do a wonderful job on this blog and am amazed at the ability to do it day after day and put it in writing while still managing investments.
I understand the S+P 500 lows of 1370 in March and August are critical for the market to hold now or lower lows are in store. I am from 25 to 35% in money markets and thinking if the 1370 lows are breached should I increase cash by selling weakest funds & stocks?
chick, thank you for the kind word.
my giving specific advice to a stranger would be a huge compliance issue and a bad idea for other reasons.
your taking advice from a stranger is a bad idea for you for several reasons.
apologies
Rick,
Roger does a great job of explaining why it is better to go with narrow products than a wide index. He also uses excellent top-down analysis to pick which sectors to overweight using those narrow products.
Where i disagree with him is the use of broad market product to hedge.
I think he will eventually come around, but we shall see.
For example, in a recession and a bear market, small cap and consumer discretionary stocks fall faster than big caps.
So why hedge with a big cap wide-index double-short instead of a small cap double-short? or a short of XLY?
It may be difficult for us to allocate 10% or more to a hedge that will simply neutralize our portfolio.
But if instead you think of it as just another "sector" it will be easier to allocate 5% to couple of those sectors.
For example, for the next x months instead of having a y% allocation to IWM, i may simply have that same allocation to TWM. In my mind, TWM is a sector that will go up in a bear market, it just happens to be an inverse fund.
I think he will eventually come around
lol
now that is a quality heckle.
...remember there is more to life than watching your account tick up and down.
Heresy! lol
chick - 25% cash is an admirable position to be in, at this stage of the game.
Roy, sometimes we need to put the laptop down and veg out with a little Ron Burgundy or an episode of King Fu.
When is the apporopriate time to add an inverse short? do you use chart technicals and if so which one? Do you also use sell stops and what is a reasonable per cent stop for an inverse fund?
What's frustrating to me is not only that my core holdings are down, but the positions that I added to mitigate the downside--ag, consumer, healthcare, commodities--are getting hammered even worse. No different internationally. It looks like another case of positive correlations across the board.
Hopefully it's short term...
When is it appropriate to add a short fund?
It may never be appropriate depending on the person. The point I have tried to make over the last 39 months of blogging is that you should have some plan of your own devising for defensive action that you can live with.
Double short is part of my solution, I have no idea if it should be part of anyone else's.
I heard a quote the other day about investing being part science and part art. For me the science is the 200 DMA. The art is the other tweaks. I have disclosed recent partial sales of MON and RIO and total sales of a REIT and a discretionary name. Those sales all look great but that is because the market is lower. I added a name in there that has gone down, agian because the market is lower--art.
Frustrating....
look back at how various asset classes did in 2001 and 2002. Most things went down but some started turning up much earlier than the US market which is an important concept for bear market (if that is what is going on) investing.
I am not concerned that what I own is mostly lower but that I own less than I would at a different point in the cycle--less exposure.
If it is a bear as I believe stocks will go down. finding the winners is less important than owning less.
I don't know what to tell anyone who is 100% in today. I have spelled out what I have done over many many months to protect against this time--that is the attempt to be forward looking. Since i am not 100% in I can't really walk in those shoes.
I have been using small amounts of double-short ETFs, not only SDS, but some that specifically hedge sectors where I feel vulnerable. This makes me feel a little more secure, although my portfolio loses value every day.
But I am asking for some advice, which I realize you can't give, and I might not follow anyway, but I would like to hear suggestions from some of your readers. I will be on vacation for two weeks in February, and I don't intend to monitor my investments in any way during that time. What are the pros and cons of selling, placing stops on them, or letting them run?
Linda
right, no answers from me but a question or two...
how does any two week period of time tie in with your overall financial plan?
If you could monitor your portfolio in that two weeks how much trading would you do?
@Rog: no heckle. You know i love you man!! i am a geek (and proud), self-employed, work 80 hours a week, live below our means and we save too much (at least according to my wife :) )... when i read your posts sometimes i feel like i am reading my own writing.
@anon: now is not a good time to add the short fund IMO. Even though it seems like we are going straight to zero we are not. We will have a violent sharp rally soon. Take that opportunity to lighten up on broken themes and to add/build your short position.
Sami, we will never rally again.
Joke joke joke
big feel-good rallies are very normal bear market occurrences--again if we even are in a bear.
Those are excellent questions, because an ordinary two weeks can't make any real difference and an extraordinary two weeks is unlikely. But I remember coming down from a French Alpine hut to the news that Iraq had invaded Kuwait.
Maybe bearish events can happen much faster than bullish ones, so there is no danger of the ultra shorts turning into loose cannons.
LInda
Isn,t it true that when it feel like the sky is falling that it indicates that we are real close to the bottom. We have had three plus 10% corrections over the last 6-7 months. If the bear started and this is a bear than it probably started about 6 months ago. The bottom that is now or in the near future and i am talking weeks may be the turn up to some thing big. i am trying to be patience, but the ride down is getting pretty rough.
BWJR
i don't think i would say a bear started 3 months before the top.
If the bottom is in or comes this week then i think the idea of bear market is not correct, more like a correction, not that it matters too much.
i'm sorry the ride feels rough but from a historical standpoint it is not a very meaningful decline...yet?
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