Before anyone gets too worked up about yesterday's decline or what might come next conditions are not changing so fast as to justify the SPX dropping by 26% at the start of the year and then rallying by 30% in six weeks.Maybe the market should be at 700 or maybe it should be at 900 but the moves between the two numbers have been panicked moves and I would not expect that we are done with panicked moves just yet.
On the way up there is hope that things are not that bad, on the way down there is fear of financial apocalypse and unfortunately I think too many people go back and forth between the two.
IndexUniverse has a post up about how poorly actively managed mutual funds did in 2008. Read the data if you are curious but it is so bad that the title of IU's podcast version of this story was Active Management Still Stinks. I'm not entirely sure what to make of the results but I think this supports a point I have been trying to make from day one here. In bear markets most stocks go down a lot. It is easier to recognize that a bear is starting (breach of the 200 DMA and the 2% rule) than to pick the stocks that will somehow go up. In that context the path of less resistance is to simply own fewer stocks when the market goes below its 200 DMA or the market goes down low single digits three months in a row.
Last up is an interview in Barron's with Jimmy Rogers. If you read all of the Rogers' interviews then you will not get any new strategic nuggets or new arguments for why he is doing what he is doing but there was one comment that I would hone in on;
Rogers: If they have the same convictions that I do (about China) then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.Barron's: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
Rogers: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States.
From the start of this site I have written a lot about foreign investing. I believe it is crucial and will only become more important over time. When I started the site I was at about 30% foreign, have increased since then and have said many times I could see being close to 50%, give or take, early in the next decade.
In the above quote Rogers is explicitly saying to chuck your homeward bias and put your money where it makes the most sense to you. My approach would be to spread it among many different countries, Rogers is more comfortable with a more concentrated allocation and you should do what you are comfortable with. I will take a moment to again bring up the limited utility of broad-based foreign funds like iShares MSCI EAFE ETF (EFA) for being heavy in Japan and Western Europe and also for it having a much higher correlation to the US market than narrower products. The higher the correlation the less diversification utility you get.
23 comments:
It's sobering to hear you say "early in the next decade," Roger. It sure snuck up fast.
Investors, it seems to me, think bigger and make more seismic shifts in their allocations (the media would say place their bets) at the turn of a decade. In the context of the so-called Lost Decade and the (hopefully) waning financial crisis, I can readily see a common thread that emphasizes global diversification.
Surely we'll be innundated with articles on the subject and it will pay to be ahead of the game. I hope you'll continue to share your thoughts on the subject with us.
Thanks as always.
642
I get worked up when the markets stray less than 1% from their open, wondering if things are going back to normal. Nice to see they're back to their old selves.
good post RR
Mr. Rogers - and Random Roger - are getting at something very important. Whether you agree with Jim on China or not, the main idea is that your asset allocation doesn't have to be tethered to wherever you live.
ETFs make this easier than ever to execute in practice. For example, if you live in Kansas City, you could put 30% of your money in a Canadian ETF, 30% in a Switzerland ETF, 20% in a Singapore ETF and 20% in Emerging Markets.
Something like this would give orthodox financial planners on Main Street a seizure. And I'm not advising these particular allocations (these are purely hypothetical examples).
***But the strange allocation above would still give you a fully diversified equity portfolio.*** All without a penny in the US.
Whether this is the right investment call or not is another story. If the US outperforms dramatically you'd be in trouble.
But from a portfolio construction point of view, the idea that just because you live in the US you need to keep all you money here looks increasingly silly.
Likewise, the long-held idea that you can't build a low-risk portfolio with foreign stocks also needs serious rethinking.
Well, personally I'd call 40% in emerging markets risky. heh.
risky and volatile are not always the same thing
From an equity standpoint, aren't they usually the same thing? If it's not volatile - i.e. you know what the return is going to be - there's no risk.
Buffett says no - Buffett says a stock that has just dropped 30% is not more risky than it was before it dropped. The stock became more volatile but less risky. Seems to apply to our discussion.
By the way - I enjoy your posts S.D.
SD - I hope you're not counting Singapore in your 40%. Singapore is exotic, yes, but definitely not an emerging market. At least not according to MSCI...
Well that's interesting. You're right. Vanguard doesn't either, but a couple of non-indexed funds I check do.
http://www.thedisciplinedinvestor.com/blog/2009/04/21/chart-bic-not-bric/
BIC no more BRIC
Roger.
Here's a timely article on leveraged ETF's that your readers should take note of. Especially while we're in this trading range.
http://www.oftwominds.com/blogapr09/DOG04-09.html
Morningstar has this to say:
Alternatives
Investors who want to avoid the credit risk and potential liquidity issues of this smaller ETN can instead invest in Direxion Commodity Trends Strategy DXCTX, an open-end fund that tracks the same index. However, this mutual fund has a higher expense ratio of 1.84% and will likely incur substantial tax liabilities and tracking error as it attempts to follow the high-turnover futures strategy of this index. There are no precise exchange-traded alternatives to this ETN yet. Other funds in the commodity asset class are based on long-only indexes such as the Dow Jones-AIG or S&P GSCI. The largest and most liquid exchange-traded products tracking those two indexes are iPath Dow Jones-AIG Commodity Index ETN DJP and iShares S&P GSCI Commodity-Indexed Trust GSG, respectively. Both of these funds also charge a 0.75% annual fee. Another alternative index providing a hedge-fund-lite strategy that can serve as a returns diversifier is PowerShares DB G10 Currency Harvest DBV, which invests in something akin to the carry trade by going long in the three highest-yielding G10 developed-economy currencies while shorting the three lowest-yielding to capture the spread.
I personally think the search for other exotic or alternative
funds are a waste in the long run and may be more harful than helpful. After all, we did without them and I never missed not having them. My personal opinion.
random's celtics 118 bulls 115
too bad, so sad...
Random question: Does anyone subscribe to any of the Morningstar newsletters? Their ETF newsletter keeps grabbing my eye.
anon 2:31 are you trying to heckle me about the Celtics?
Too bad so sad the Celtics won the second game. Not sure what your deal is.
I read the Rogers interview last night, and think a key point is left out of your excerpt. Rogers at one point says something to the effect of, "If you don't have a healthy familiarity with China, you shouldn't invest there." (That's a loose paraphrase.) I think that's an important point though. He's definitely not telling Joe Investor to put all his money into the Chinese market, because odds are Joe Investor doesn't know the difference between China and Korea, and therefore isn't equipped to make educated investment choices.
Roger. I think Anon 2:31 was heckling the guy who heckled you yesterday about the Bulls beating the Celtics in game 1. Go Nuggets (are they even in the play-offs?).
The nuggets are in there against the Hornets.
Leon Powe is out for the Celtics--they a little depleted
SD,
Yes, I subscribe to their Income Investor Newsletter, and used to subscribe to their Growth Stock Investor.
Not bad, but as Roger has pointed out in the past, they give pretty short shrift to anything resembling macro analysis...they're a pretty pure "bottom up" shop. They're also REALLY conservative on their valuations....sort of a "uber Ben Graham". When they've got something as a 5 star (consider buying), its either a screaming deal, or they've missed something badly. They did poorly calling the financials (New Century, Doral, Allied Capital) prior to the blow-up/meltdown, although they obviously weren't the only ones.
Jan
Can you explain the 2% rule you mentioned? thanks
you could do a search for the term in the search box on the right hand side bar and I explain it in the post.
Low single digit decline (IE 2%) three months in a row
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