I had that thought as I read this article in the Wall Street Journal about investment advisers starting to look at alternatives to buy and hold. According to the article more advisers are exploring tactical moves (ie defensive action) and introducing "new" asset classes into their clients' portfolios.Long time readers will know I have been writing about this stuff since 2004 (which is as long as I have been writing). Creating a zigzag effect by whatever means possible with whatever tools available, IMO, gives the best chance for successfully navigating a bear market.
I imagine a few things inspired me in this line of thought including the first few things I ever read about the Harvard and Yale endowments.
While I obviously believe in this line of thought the time to explore this was several years ago not after the second 50% decline for stocks in this decade. One of the reasons I gravitate to the 200 DMA for defensive action is that it triggers early in the bear market. Not at the top mind you but early. Once heeded most of the work is done. No big decisions need to be made just decisions about tweaks and the tweaks are far less important than taking action of some sort when the original breach occurs.
While I generally like the ideas spelled out in the article I think the timing is horrible. Anyone who dropped all 50% is probably better off hanging in there as difficult as that might be. The fastest path to portfolio recovery from cutting in half will not come from selling a bunch of stock low and moving into a bunch of things that do not capture the market's beta. If volatility hurt you on the way down it probably makes sense to let it help you on the way up, whether the real way up is happening now or not.
In my opinion the time to entertain making big methodological changes should come during bull markets while you're feeling good not when your state of mind is "if I can only get back to X then I'll..."
I have no plans for big methodological changes. I have learned a few things in this bear that I hope will help smooth out the next bear phase more so than this one but I will continue to utilize a defensive strategy, incorporate alternatives asset classes and realize that while I might like to buy and then hold that will probably not be the best course of action.
One point of clarification. I would love to be able to hold something forever once I buy it but I do not believe that is realistic.
19 comments:
It really should be buy/hold/rebalance. I suspect that we'll be reading articles similar to the one you referenced at some point touting the virtues of buy and hold after many have given up on it. The key is sticking to it in all conditions, otherwise it will fail. Those who rebalanced or directed interest and dividends into the poorer performing asset classes are starting to smile now.
I think buy and hold is feasible if you buy broad ETF's, but you are correct that the time for defensive action is long over. I am considering getting more aggressive.
In the future I think taxes will require buy and hold. Likely buy foreign etfs and hold.
I do still think another leg down is coming, but I am not so sure it is soon as opposed to 2010 or 2011. We are turning Japanese.
SEG
Diversification hasn't worked recently. Buy and hold hasn't worked recently. I don't conclude that either are dead but perhaps discredited in the short run. On the other hand, so many people are now watching moving averages that I worry they may stop working, too.
Anon 6:08 makes a good point about rebalancing, which is tends to get overlooked when the sky is falling.
As one of those who bought and held and rebalanced, I agree with your take Roger, best thing to do is stay the course. Getting defensive now just means locking in losses. Many thanks for lessons learned from your excellent posts, I will be implementing a defensive strategy next time bull turns to bear.
Haven't changed much in method for some years now but caught the 'permanent portfolio' bug fairly early so strategic rebalancing and tactical alpha at the margins came fairly naturally.
In my experience very long term single holdings can happen rather organically too and, not surprisingly, depend on investing environment. For example, when I first started investing in the 80's, brokerage costs to the retail customer were still very high and grew even steeper if you traded odd lots (not a multiple of 100 shs) so I only worked with companies who had dividend reinvestment plans (DRiPs) and also allowed direct initial purchase of shares at no transaction cost.
Don't know of any corporations that still do that -- many have a DRiP but it's managed by an outside firm like Wells Fargo -- and I haven't started a new DRiP in ages but I still own quite a few shares in several corporate DRiP's, including a couple of the earliest (25 and 22 years now), because they remain viable businesses and the unrealized capital gains are frankly major.
I agree with the point that the correct catch phrase for investors is better stated: buy/hold/rebalance. To me buy and hold has always had the issue of "hold until when". When you die? When you retire? When you have a financial emergency? When you saved enough to make a large expenditure? etc.
All these examples are "hold until something happens in your life" . The timeline of your life is not well "correlated" to the market. Hence, you should "hold until something changes in the market/world." ...then rebalance.
I guess the "change in the market" that Roger uses to "rebalance" was the stock market crossing the 200dma and an inverted yield curve. For me. I think about changing my allocations based on the ratio of interest rates to dividend yield and p/e. I'm not sure I hear too many "rules of thumbs" on when to add/subtract commodities exposure. Anyone have any ideas?
Roger, I don' ever see too much research on rebalancing. Most of the material I see is fairly basic (i.e. rebalance every x months or rebalance when you get y% over/under your target allocation). Do you know of any good research on this topic?
roger,
the QQQQ (nasdaq 100) has traded above its 200 day moving average all day. now i don't want to get too excited about only one major indicator going over the 200 dma, but personally, i regard qqqq as second only to the s&p 500. some technically oriented traders regard it as more relevant (though i can not explain why they view it that way.)
what's your view on this possible "green shoot" emanating from the markets itself??
regards,
--gjg49
i'm sorry i don't have any sort of rsearch to point you to.
gjg49, at almost 60% tech i view QQQQ as a proxy for tech (as does everyone, right?). Tech is not the only sector above its 200 DMA.
i try to be neither pessimistic or optimistic. i favor certain indicators and will heed what they say.
Oh, don't be such a Vulcan, Roger. Live a little! Re-equitize at the 199 dma this cycle.
"Anything that relies on correlation is charlatanism." - The Black Swan.
Roger, much your investment ideas are based on correlation and distribution of risk, this is what you learned in school.
Too bad it is all speculation (nice word for gambling) and nothing to do with investing.
great post - I would think that even if I didn't think the same thing when I read the article - talk about driving with the rearview mirror. However, I suppose it is good business to give the customer what they want - even if it is not what is best for them. I think it is too much for retail advisers to do any more - they don't get paid for being right.
Since bonds have done quite well but will have a correction, is there anything that would cause you to reduce, change bond positions and what will have to happen to put you on defense with fixed income?
200 DMA, isn't that just technical analysis? Why not then Elliot Waves? I wonder if Walmart makes strategic decisions based on 200 day moving averages of transaction figures.
anon 1:19 fixed income is not as objective for me as equities. there are times to increase (relatively volatility or take more chances and times not to.
also when yields are too low i buy less. clients are underinvested becuase yields are so low in some areas and spreads not right in others.
2:21 at times the 200dma will be the best and at other times not. i'd rather explain 200 dma to clients than Elliot Waves.
Tax avoidance will need to rank higher than extracting an extra 2-3% from eclectic investments in the "new world order".
Accomplishing both? Priceless.
T
I would venture to say that buy and hold is appealing to most people when the equity markets are rising. I believe most people overestimate their risk tolerance and allocate more to equities than they should have from the outset. They don't find out their true tolerance until times like we have experienced during the past year or so. Then, they do the exact opposite of what the buy/hold/rebalance strategy says to do by selling in down equity markets and then say the strategy has failed.
The strategy is not for speculators. Every investor needs to understand their ability, need, and willingnes to take risk as Larry Swedroe is fond of saying. The silly 10 question risk tolerance surveys are insufficient IMO. I think this is an area where a financial advisor who places his client's interests first can really make a difference. I really think the initial mis-allocation problem and lack of discipline are the reasons buy and hold fail for most people.
The whole strategy seems logical on paper, but counter-intuitive in extreme bear & bull markets. You know the drill, buy high, sell low. There has been some behavioral research that attempts to explain it.
I really doubt many people have the ability to sucessfully follow buy and hold. I would think certain groups like engineers and farmers would have little trouble.
T,
Agreed. Indeed, taxes are a significant factor even now. I'm afraid we ain't seen nothin' yet.
Don't you have investors you manage that need cash flow? Where are you getting that?
also when yields are too low i buy less. clients are underinvested becuase yields are so low in some areas and spreads not right in others.
under invested does not mean 100% cash. there are dividends and interest payments coming in all the time. a reasonable withdrawal rate allows for weathering a period like now where buying a lot of stuff is a bad idea.
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