That was my thought as I read this article from the WSJ about debt recently issued in Mongolia. You can read the article to learn about Mongolia's recent past but as part of the offering there was a ten year tranche which was priced to yield 5.125% and there was demand for the paper.
Nominally speaking 5% for ten years seems pretty good these days but as one manager is quoted that doesn't adequately compensate the risk for lending money to Mongolia for ten years. The long term prospects for Mongolia are great because of the vast resources in the ground there but the government has done a couple of things that could impede the progress between here and "great." I think of it as being theirs to lose and they could lose.
The apparent success of the offering is easy to understand which is that yield is harder to come by from the usual slices of the fixed income market and so more investors (both institutional and individual) are going to places that ten years ago would have never occurred to them.
At some point enhancing yield turns into chasing yield and yield chasers often get hurt. A complacency develops about the risk taken by owning certain things and the complacency gets rewarded because nothing bad happens for a while. This is along the lines of a Minsky Moment which is one of the behaviors that was widely discussed after the financial crisis was widely known to have started.
Some investors mentally minimize the risk they are taking with their yield chasing but there are other investors that I think don't realize they are taking risk. Both sets of investors face the same bad outcome but the behaviors are a little different.
This applies to both equities and fixed income. We are currently in a zero percent world. An equity portfolio that owns a lot of MLPs and mortgage REITs such that the mix yields 7 or 8% is taking a lot of risk. There is no way to know whether or not there will ever be a meaningful consequence for that risk but it is being taken. Similarly a fixed income portfolio heavily concentrated in long dated low quality paper is also taking a lot of risk. There will definitely be investors that successfully trade around that risk and not get hurt but there will be more investors who do not successfully trade around that risk and they will get hurt badly.
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Wikinvest Wire
Friday, November 30, 2012
Wednesday, November 28, 2012
Tax the Rich!
A couple of months ago my wife and I took a trip to Boston and New York and while there we had lunch with an old friend of mine whom I've known since fourth grade. My friend believes that taxes will and should go up on the wealthy. It seems pretty obvious that he is correct that they will go up but there is more of a conversation to be had about whether they should go up.
Several years ago as the scope of the US' fiscal problems I made the obvious and un-unique observation that to actually fix things it would require sacrifice on the part of everyone, that it would hurt and I didn't the the political will existed to do what needs to be done. Maybe some progress is happening on the political will front but that remains to be seen.
Karl Denninger posted the above chart recently that captures the scope of the problem. In their never ending coverage of the fiscal cliff CNBC has offered up that increasing taxes on the wealthy will solve the problem for about a week or two. That is not a reason by itself to not raise taxes but it would do very little.
In all likelihood a real fix will have to involve a lot of little things that by themselves are too small to matter. Per the above table there are only three big things to cut into that could by themselves make a difference. Are entitlements and defense really on the table?
Any program that endures cuts will adversely affect some constituency which is of course the meaning of everyone having to sacrifice something. Any action taken will have consequences to them; raising taxes will act as some sort of weight on demand. I would hope to hear a real acknowledgement of those consequences and that those likely consequences were taken into account in putting together the specific details of the, continuing the example, tax hikes.
My personal base case has been to expect getting means tested out of my social security check when the time comes but there certainly could be other things coming in addition to or instead of and if "fixing it" really is a priority for the country then we all need to understand this reality.
Read more!
Several years ago as the scope of the US' fiscal problems I made the obvious and un-unique observation that to actually fix things it would require sacrifice on the part of everyone, that it would hurt and I didn't the the political will existed to do what needs to be done. Maybe some progress is happening on the political will front but that remains to be seen.
Karl Denninger posted the above chart recently that captures the scope of the problem. In their never ending coverage of the fiscal cliff CNBC has offered up that increasing taxes on the wealthy will solve the problem for about a week or two. That is not a reason by itself to not raise taxes but it would do very little.
In all likelihood a real fix will have to involve a lot of little things that by themselves are too small to matter. Per the above table there are only three big things to cut into that could by themselves make a difference. Are entitlements and defense really on the table?
Any program that endures cuts will adversely affect some constituency which is of course the meaning of everyone having to sacrifice something. Any action taken will have consequences to them; raising taxes will act as some sort of weight on demand. I would hope to hear a real acknowledgement of those consequences and that those likely consequences were taken into account in putting together the specific details of the, continuing the example, tax hikes.
My personal base case has been to expect getting means tested out of my social security check when the time comes but there certainly could be other things coming in addition to or instead of and if "fixing it" really is a priority for the country then we all need to understand this reality.
Read more!
Tuesday, November 27, 2012
Don't Swim Up Stream
A reader at Barry Ritholtz' blog asked Barry the following question;
The context was the extent to which Barry refers to the Folly of Forecasting. I think Barry and I draw similar conclusions about the role of forecasting in the management process and what really should be forecasted.
I think a big part of my influence here comes from John Hussman. From the idea of taking little bits of process from various places to create your own process Hussman tries to assess probabilities of outcomes that are broader than whether to buy Qualcom (QCOM) before the earnings or having a year end target for some broad index.
The role of "forecasting" is more along the lines of trying to swim with the current than against it. For example when the market starts to discount a recession/bear market, the industrial sector tends to get hit very hard which is something I have mentioned many times before. Rising interest rates are bad for certain sectors. Bull market phases tend to last four-five years. There are quite a few others that I have mentioned over the years.
In my opinion understanding these sorts of rules of thumb can make the task of navigating a cycle a little easier. After a five year bull run it probably makes sense to not give the market the benefit of the doubt when it shows signs of rolling over slowly (another rule of thumb is that bear markets start slowly over several months, they don't start with fast declines).
These sorts of things are part of the top down process and contribute to the decision to be in the market or not, how much to be in and decisions about sector weightings. Hopefully it is clear that this part of the process is reasonably accessible to many participants and can go a long way to successfully investing at the sector level and of course just about every fund provider has a suite of ETFs to get the job done.
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I believe you have written the above statement before on your blog, though I don’t have any links to prove that, and while I too believe forecasting is fatal, my feeling is that you must use some forecasting when choosing stocks/funds/ETFs for your clients.
The context was the extent to which Barry refers to the Folly of Forecasting. I think Barry and I draw similar conclusions about the role of forecasting in the management process and what really should be forecasted.
I think a big part of my influence here comes from John Hussman. From the idea of taking little bits of process from various places to create your own process Hussman tries to assess probabilities of outcomes that are broader than whether to buy Qualcom (QCOM) before the earnings or having a year end target for some broad index.
The role of "forecasting" is more along the lines of trying to swim with the current than against it. For example when the market starts to discount a recession/bear market, the industrial sector tends to get hit very hard which is something I have mentioned many times before. Rising interest rates are bad for certain sectors. Bull market phases tend to last four-five years. There are quite a few others that I have mentioned over the years.
In my opinion understanding these sorts of rules of thumb can make the task of navigating a cycle a little easier. After a five year bull run it probably makes sense to not give the market the benefit of the doubt when it shows signs of rolling over slowly (another rule of thumb is that bear markets start slowly over several months, they don't start with fast declines).
These sorts of things are part of the top down process and contribute to the decision to be in the market or not, how much to be in and decisions about sector weightings. Hopefully it is clear that this part of the process is reasonably accessible to many participants and can go a long way to successfully investing at the sector level and of course just about every fund provider has a suite of ETFs to get the job done.
Read more!
Sunday, November 25, 2012
Sunday Morning Coffee
Barron's profiled a hedge fund manager named Jaime Rosenwald who in addition to running his fund he also teaches a graduate level course on value investing at NYU. There was one nugget in there that I thought was interesting and can be applied beyond what is stated;
We talk a lot about the extent to which many investors engage in what turns out to be self destructive (investment) behavior. At a time like now it is easy to say "of course bear markets happen" or "I can tolerate the ups and downs of the stock market or say you will avoid owning too much of a fad that then sours and implodes. Unfortunately investors panic all too often, do load up on fads that then implode, eschew discipline and generally lose their ability for rational thought when they most need it.
Just as exercising and having a moderate diet will not guarantee good long term health, taking the time to learn what the right things are and then making the effort to do the right things gives you a better chance of reaching your objective whether it is good health, a successful financial plan, hopefully both and hopefully a couple of other objectives in life.
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By definition, most investors can't beat the market. But market-beating practices can be taught...
We talk a lot about the extent to which many investors engage in what turns out to be self destructive (investment) behavior. At a time like now it is easy to say "of course bear markets happen" or "I can tolerate the ups and downs of the stock market or say you will avoid owning too much of a fad that then sours and implodes. Unfortunately investors panic all too often, do load up on fads that then implode, eschew discipline and generally lose their ability for rational thought when they most need it.
Just as exercising and having a moderate diet will not guarantee good long term health, taking the time to learn what the right things are and then making the effort to do the right things gives you a better chance of reaching your objective whether it is good health, a successful financial plan, hopefully both and hopefully a couple of other objectives in life.
Read more!
Saturday, November 24, 2012
The Big Picture for the Week of November 25, 2012
Reuters reported that Fitch downgraded Sony's (SNY) debt to junk status. This is very interesting from the standpoint that any company, including Apple (AAPL) which we own for clients and the fund we subadvise, can see its fortunes change such that they fail or become a small fraction of what they once were. In the 1980s and into the 1990s Sony was a global powerhouse.
We've talked in this context about Kodak but another one that still has a heartbeat is Xerox. We could probably list a bunch of other truly and formerly iconic names that would make us say "oh yeah" but this is a common enough occurrence to better understand why position sizing is so important.
All too often people get caught in positions that are too large at the wrong time. In the past when I've made similar comments there were reader comments that disagree philosophically which is of course ok but what might not be ok is the confidence expressed about being able to see this sort turn coming in a company.
Of course there are people who can see the end (or serious negative changes) coming but that is not going to be the majority. Think about the parade of pundits who loved Apple at $700. I don't think the recent drop heralds the end by any means but generically speaking some 20% drops are serious and some are not. While it is quite clear to me that Apple is not in real trouble (I would not have bought after most of the recent decline from $700) I could be wrong, again the context here is more generic.
My approach is not let any single position be capable of causing a financial plan rewrite. How much is too much depends on the end user. If you owned ten stocks and you could not see a failure or near failure coming would that type of hit be tolerable? Keep in mind that a failed company would be along the lines of permanently impaired capital which is different than a portfolio of healthy companies that collectively go down 25% or 35% in a 30% bear market decline only to then recover and go on to new highs. Kodak isn't going back to $90.
There is no single correct answer to the question above, only the answer right for you. Some past commenters have claimed to be comfortable with just five holdings and chances are some of them actually are. There is no way that any sort of money manager investing other people's money could own just five stocks for too much litigation risk. I don't know about ten stocks but since there are mutual funds with just 20 holdings I imagine that number is ok for money managers investing on behalf of clients.
So if you really are a five stock person then that is a potential advantage you have over a professional who might only want that number but can't. Well, a perceived advantage until something blows up.
Read more!
We've talked in this context about Kodak but another one that still has a heartbeat is Xerox. We could probably list a bunch of other truly and formerly iconic names that would make us say "oh yeah" but this is a common enough occurrence to better understand why position sizing is so important.
All too often people get caught in positions that are too large at the wrong time. In the past when I've made similar comments there were reader comments that disagree philosophically which is of course ok but what might not be ok is the confidence expressed about being able to see this sort turn coming in a company.
Of course there are people who can see the end (or serious negative changes) coming but that is not going to be the majority. Think about the parade of pundits who loved Apple at $700. I don't think the recent drop heralds the end by any means but generically speaking some 20% drops are serious and some are not. While it is quite clear to me that Apple is not in real trouble (I would not have bought after most of the recent decline from $700) I could be wrong, again the context here is more generic.
My approach is not let any single position be capable of causing a financial plan rewrite. How much is too much depends on the end user. If you owned ten stocks and you could not see a failure or near failure coming would that type of hit be tolerable? Keep in mind that a failed company would be along the lines of permanently impaired capital which is different than a portfolio of healthy companies that collectively go down 25% or 35% in a 30% bear market decline only to then recover and go on to new highs. Kodak isn't going back to $90.
There is no single correct answer to the question above, only the answer right for you. Some past commenters have claimed to be comfortable with just five holdings and chances are some of them actually are. There is no way that any sort of money manager investing other people's money could own just five stocks for too much litigation risk. I don't know about ten stocks but since there are mutual funds with just 20 holdings I imagine that number is ok for money managers investing on behalf of clients.
So if you really are a five stock person then that is a potential advantage you have over a professional who might only want that number but can't. Well, a perceived advantage until something blows up.
Read more!
Friday, November 23, 2012
Stock Pickers No More?
CNBC's website posted a wide ranging article titled Why the Days of Stock Picking May Be Coming to an End. It covered why stock pickers have generally not done well in the last couple of years, why this has helped sector ETFs (and maybe country funds too?), how stock analysts are not political analysts and why that matters and a discussion about passive versus active management.
For part of the article stock pickers was synonymous with active managers. It has been a while since I heard anyone say "it is not a stock market it is a market of stocks" but this entire notion should be dismissed for most market participants. Yes, certain types of fund managers do need to be accountable in three month increments but there aren't too many people whose actual goals are tied to the calendar quarter. If your portfolio owns a couple of stocks that are up a bazillion percent since you bought 25 years ago and/or your yield exceeds your cost basis then you probably don't care that it lagged the SPX this year.
If people perceive that stock picking has become more difficult then it is logical to think that sector funds, country funds and thematic funds have found an audience. At least I hope so. I believe there has always been a middle ground between owning a couple of the broadest indexes via funds and a portfolio with room enough for seven different biotech stocks. ETFs now make it much easier for this middle ground to build a portfolio in this manner.
I think most bottom up stock pickers would say they are not concerned with the macro political environment--a telecom analyst would probably want to keep tabs on big stuff going on at the FCC though, as an example. However top down portfolio managers do keep tabs on political goings on and while no one may get them all correct it usually is part of the process.
Active versus passive is always a worthwhile discussion but usually incomplete IMO. To make the discussion complete it needs to include the appropriate time horizon and risk adjusted results. Specifically these things need to align between manager and client. Generically speaking, getting 80% of the market's return with 50% of the market's risk or volatility (however you want to think about it) is a fantastic result as long as you know that is what your manager is trying to do and understand what your manager is trying to do. If you must be up 15% in an up 10% world, that is not what your manager is trying to do and you don't know it then there will be serious disappointment.
Read more!
For part of the article stock pickers was synonymous with active managers. It has been a while since I heard anyone say "it is not a stock market it is a market of stocks" but this entire notion should be dismissed for most market participants. Yes, certain types of fund managers do need to be accountable in three month increments but there aren't too many people whose actual goals are tied to the calendar quarter. If your portfolio owns a couple of stocks that are up a bazillion percent since you bought 25 years ago and/or your yield exceeds your cost basis then you probably don't care that it lagged the SPX this year.
If people perceive that stock picking has become more difficult then it is logical to think that sector funds, country funds and thematic funds have found an audience. At least I hope so. I believe there has always been a middle ground between owning a couple of the broadest indexes via funds and a portfolio with room enough for seven different biotech stocks. ETFs now make it much easier for this middle ground to build a portfolio in this manner.
I think most bottom up stock pickers would say they are not concerned with the macro political environment--a telecom analyst would probably want to keep tabs on big stuff going on at the FCC though, as an example. However top down portfolio managers do keep tabs on political goings on and while no one may get them all correct it usually is part of the process.
Active versus passive is always a worthwhile discussion but usually incomplete IMO. To make the discussion complete it needs to include the appropriate time horizon and risk adjusted results. Specifically these things need to align between manager and client. Generically speaking, getting 80% of the market's return with 50% of the market's risk or volatility (however you want to think about it) is a fantastic result as long as you know that is what your manager is trying to do and understand what your manager is trying to do. If you must be up 15% in an up 10% world, that is not what your manager is trying to do and you don't know it then there will be serious disappointment.
Read more!
Tuesday, November 20, 2012
Strategy Notes
Escalating violence in the Middle East? Fuggedaboutit baby, buy stocks!
Days like yesterday are clearly driven by emotion. In the last couple of weeks concern was mounting about the near term prospects for stocks maybe even to the point of there being fear.
One reader left a comment related to the 2% rule asking whether this was shaping up to be a fast decline not a slow rolling over which is how bear markets tend to start. Remember we are about two months from the market's peak and the 2% rule pertains to an average 2% monthly decline for three months in a row.
People always want to hear predictions about what will happen and while a couple of weeks ago I said on CNBC I thought there would be something of a back slide in the market in the immediate term I don't think the next bear will start until well into 2013 or maybe 2014.
To the above question about the 2% rule, more important than predictions or guesses in my opinion is discipline to whatever it is you do. If you hold on no matter what then you should hold on no matter what. If you use some sort of trigger point for defensive action then you should stick to that. The time to change what you do is not on the fly after your trigger point has been breached as chances are you were less emotionally involved when you mapped out your defensive strategy.
The defensive action we took so far in large accounts amounted to getting rid of names that had not been doing very well but served to increase our cash position allowing us the flexibility to take more serious defensive action or if things go the other way to get more long the market.
Read more!
Days like yesterday are clearly driven by emotion. In the last couple of weeks concern was mounting about the near term prospects for stocks maybe even to the point of there being fear.
One reader left a comment related to the 2% rule asking whether this was shaping up to be a fast decline not a slow rolling over which is how bear markets tend to start. Remember we are about two months from the market's peak and the 2% rule pertains to an average 2% monthly decline for three months in a row.
People always want to hear predictions about what will happen and while a couple of weeks ago I said on CNBC I thought there would be something of a back slide in the market in the immediate term I don't think the next bear will start until well into 2013 or maybe 2014.
To the above question about the 2% rule, more important than predictions or guesses in my opinion is discipline to whatever it is you do. If you hold on no matter what then you should hold on no matter what. If you use some sort of trigger point for defensive action then you should stick to that. The time to change what you do is not on the fly after your trigger point has been breached as chances are you were less emotionally involved when you mapped out your defensive strategy.
The defensive action we took so far in large accounts amounted to getting rid of names that had not been doing very well but served to increase our cash position allowing us the flexibility to take more serious defensive action or if things go the other way to get more long the market.
Read more!
Monday, November 19, 2012
Two Good Reads
The first one is an essay by Nassim Taleb about volatility in the Wall Street Journal.
The second one is a roundtable from Barron's about how three different advisors use ETFs to construct client portfolios.
There wasn't a lot that was new but they were still both useful reads.
Read more!
The second one is a roundtable from Barron's about how three different advisors use ETFs to construct client portfolios.
There wasn't a lot that was new but they were still both useful reads.
Read more!
Sunday, November 18, 2012
Sunday Morning Coffee
This weekend totally blew up here in Walker. We are moving into a house we have been sprucing up some. After painting for many hours on Friday, we "had" to let our dog Pee Wee sleep with us because he got injured trying to go out the dog door at the same time as one of the big dogs. He was pretty much squealing all night anytime he moved.
Then a little after midnight on Saturday morning we got toned out to a structure fire and I was up an gone until almost 3am. After two structure fires in ten years we've had three in the last 35 days. We then had our regularly scheduled fire training from 8am until around 11am. Then in the afternoon we moved some stuff to the new house.
I got to read most of Barron's though and there were some funny thing this week. There was a quick word on MedBox (MDBX) which makes vending machines to distribute medical marijuana. It has a sky high valuation, ahthankyou. There was also a mention of the "unimpressive" casinos run by Penn Gaming.
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The first picture is of me manning the engine at the structure fire and the second one was from training. Joellyn took Pee Wee to the vet (a one off expense) Saturday morning, it was the equivalent of a bad sprain. Regular blogging should resume tomorrow.
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I got to read most of Barron's though and there were some funny thing this week. There was a quick word on MedBox (MDBX) which makes vending machines to distribute medical marijuana. It has a sky high valuation, ahthankyou. There was also a mention of the "unimpressive" casinos run by Penn Gaming.
.jpg)
The first picture is of me manning the engine at the structure fire and the second one was from training. Joellyn took Pee Wee to the vet (a one off expense) Saturday morning, it was the equivalent of a bad sprain. Regular blogging should resume tomorrow.
Read more!
Friday, November 16, 2012
Bear Market Odds and Ends
A couple of odds and ends this morning.
In my opinion it is absolutely too early to call this a bear market. For now the SPX is below its 200 DMA and the behavior of the market has not been good. There is no reason that a week or two from now all could be right with the world but if things have not improved a month from now then that would probably indicate the next bear market had started.
We executed a small trade yesterday in large accounts by selling MSCI (MSCI). The name got crushed a little over a month ago when Vanguard announced it would be switching benchmark indexes for quite a few of its funds. When the news broke the stock plunged in what I described as a panic. As I said at the time panic declines often snapback some portion of the decline quickly. That happened to a point but it has back slid some since.
Selling the name does increase the cash and puts the portfolio in a more defensive position but I also think of this trade as a cleanup type of trade too, similar to the trade executed earlier in the week. Taxable accounts can take the loss and all accounts can move on from one that ended up not working out well.
We sold MSCI for RRGR in October because the year for the fund ended on October 31 and the fund needed the loss to help offset a realized gain. We bought Blackrock for RRGR when we sold MSCI and we sold Blackrock yesterday to be consistent with the MSCI sale.
A reader comment noted the recent drop in MLPs and wondered what accounted for the drop and then suggested that perhaps people were selling to get the current 15% capital gain rate before it possibly goes up in 2013.
There are two things to address here. This link suggests that MLPs are perceived losers of the presidential election. We will see whether or not they are actual losers but the kind of tax changes implied in that link do scare markets. The closest example I can think of is from October 2006 when the Canadian Royalty Trusts got decimated because the Canadian government announced taxation changes. I referred to this example before and have also been consistent in saying why 20-25% in MLPs, as some pundits suggest, is a bad idea. I have to believe the fear will be worse than the reality but we only have a 2-3% weighting in the space and being wrong about the consequence will not be problematic for client accounts or the fund we manage.
The other point from the reader comment is about selling now to get a lower capital gains tax rate. This is getting a lot of attention but what is being implied (and makes no sense to me) is that people are selling names they would not otherwise sell to pay 15% now versus paying nothing in the future. What I mean here is if you know you need to sell soon then yes 15% is the safe sale but if you own stocks or funds that you would not otherwise be selling anytime soon then it makes no sense to lock in a gain.
Read more!
In my opinion it is absolutely too early to call this a bear market. For now the SPX is below its 200 DMA and the behavior of the market has not been good. There is no reason that a week or two from now all could be right with the world but if things have not improved a month from now then that would probably indicate the next bear market had started.
We executed a small trade yesterday in large accounts by selling MSCI (MSCI). The name got crushed a little over a month ago when Vanguard announced it would be switching benchmark indexes for quite a few of its funds. When the news broke the stock plunged in what I described as a panic. As I said at the time panic declines often snapback some portion of the decline quickly. That happened to a point but it has back slid some since.
Selling the name does increase the cash and puts the portfolio in a more defensive position but I also think of this trade as a cleanup type of trade too, similar to the trade executed earlier in the week. Taxable accounts can take the loss and all accounts can move on from one that ended up not working out well.
We sold MSCI for RRGR in October because the year for the fund ended on October 31 and the fund needed the loss to help offset a realized gain. We bought Blackrock for RRGR when we sold MSCI and we sold Blackrock yesterday to be consistent with the MSCI sale.
A reader comment noted the recent drop in MLPs and wondered what accounted for the drop and then suggested that perhaps people were selling to get the current 15% capital gain rate before it possibly goes up in 2013.
There are two things to address here. This link suggests that MLPs are perceived losers of the presidential election. We will see whether or not they are actual losers but the kind of tax changes implied in that link do scare markets. The closest example I can think of is from October 2006 when the Canadian Royalty Trusts got decimated because the Canadian government announced taxation changes. I referred to this example before and have also been consistent in saying why 20-25% in MLPs, as some pundits suggest, is a bad idea. I have to believe the fear will be worse than the reality but we only have a 2-3% weighting in the space and being wrong about the consequence will not be problematic for client accounts or the fund we manage.
The other point from the reader comment is about selling now to get a lower capital gains tax rate. This is getting a lot of attention but what is being implied (and makes no sense to me) is that people are selling names they would not otherwise sell to pay 15% now versus paying nothing in the future. What I mean here is if you know you need to sell soon then yes 15% is the safe sale but if you own stocks or funds that you would not otherwise be selling anytime soon then it makes no sense to lock in a gain.
Read more!
Thursday, November 15, 2012
Is It Time to Send In The Bears?
On December 13, 2007 I had a blog post titled Send In The Bears? where I said I felt a bear market has started. The idea there was a generally deteriorating market combined with several macro factors that you can read about if you are so inclined.
At this point it is early to know whether a bear market has started, calling one early is generally unnecessary if you believe, as I do, that actual bear markets start slowly giving plenty of time to get out. As disclosed earlier this week we have started defensive action consistent with the SPX breaching its 200 DMA but if this is a bear market, I don't believe there is urgency to go 50% cash this week as some media outlet have or will imply.
One contributing indicator is something called the 2% rule which I have referred to many times and that I learned about in my short time working at Fisher Investments quite a few years ago. In a nutshell the 2% rule says that a bear market has started if the benchmark averages a 2% decline three months in a row. The market is heading in the direction being two months from its peak but two months is not three months.
I will be paying close attention and would expect to get more aggressive with defensive trades should the 2% rule come into play.
Yesterday we initiated defensive action in so called mid sized accounts where we use mostly sector ETFs. Most of these accounts own the Industrial Sector SPDR (XLI) at what had been about a market neutral weight. With yesterday's partial sale we cut the exposure to the sector in half.
One aspect of this site is to allow anyone who is interested to look at the thought process as it unfolds which is the ground covered above.
Read more!
At this point it is early to know whether a bear market has started, calling one early is generally unnecessary if you believe, as I do, that actual bear markets start slowly giving plenty of time to get out. As disclosed earlier this week we have started defensive action consistent with the SPX breaching its 200 DMA but if this is a bear market, I don't believe there is urgency to go 50% cash this week as some media outlet have or will imply.
One contributing indicator is something called the 2% rule which I have referred to many times and that I learned about in my short time working at Fisher Investments quite a few years ago. In a nutshell the 2% rule says that a bear market has started if the benchmark averages a 2% decline three months in a row. The market is heading in the direction being two months from its peak but two months is not three months.
I will be paying close attention and would expect to get more aggressive with defensive trades should the 2% rule come into play.
Yesterday we initiated defensive action in so called mid sized accounts where we use mostly sector ETFs. Most of these accounts own the Industrial Sector SPDR (XLI) at what had been about a market neutral weight. With yesterday's partial sale we cut the exposure to the sector in half.
One aspect of this site is to allow anyone who is interested to look at the thought process as it unfolds which is the ground covered above.
Read more!
Wednesday, November 14, 2012
Of Bear Markets and Defensive Strategies
A couple of questions came in on yesterday's blog post that I wanted to try to answer.
One reader asked the percentage that Monday's trade raised in cash. Another reader answered for me that just about all such trades tend to be a couple of percent or so which was the case with this one. One thing to remember is that bear markets start slowly over several months giving plenty of time to get out. We choose a breach of the 200 DMA as a starting point because it is simple to track and easy to explain to clients, oh and we have a reasonable basis to believe it is effective for our objective of trying to avoid the full brunt of large declines.
One reader asked about getting whipsawed by the 200 DMA. The answer here depends on your definition of whipsaw. For example if we sold one position with a low single digit weighting, as we did on Monday, and the market were to start a six week 20% rally to close out the year then the drag from the sale would be negligible. Obviously a more aggressive selling of stock as some do would meet more people's definition of whipsaw. I don't think whipsaw pertains in the case of a small trade but you may view it differently.
Another question was on how we decide what to lighten up on and if there is anything we would buy. It is different every time. Often we are looking to remove volatility but this time removed a holding that had not been doing very well. In an instance where removing volatility is a focus then you would expect that we would reduce exposure to a sector that is typically more volatile than most of the others. For investors who just use broad asset class funds then it would make sense to consider taking defense from their small cap exposure--for investors who believe in defensive action based on whatever criteria they deem suitable.
We would consider buying market neutral funds and inverse funds and did so during the last bear market.
I want to repeat something from above;
The best thing would be for you to look at charts from past bear markets and see for yourself how this has worked before. This is a normal market behavior which has repeated many times and so I believe in the idea going forward.
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One reader asked the percentage that Monday's trade raised in cash. Another reader answered for me that just about all such trades tend to be a couple of percent or so which was the case with this one. One thing to remember is that bear markets start slowly over several months giving plenty of time to get out. We choose a breach of the 200 DMA as a starting point because it is simple to track and easy to explain to clients, oh and we have a reasonable basis to believe it is effective for our objective of trying to avoid the full brunt of large declines.
One reader asked about getting whipsawed by the 200 DMA. The answer here depends on your definition of whipsaw. For example if we sold one position with a low single digit weighting, as we did on Monday, and the market were to start a six week 20% rally to close out the year then the drag from the sale would be negligible. Obviously a more aggressive selling of stock as some do would meet more people's definition of whipsaw. I don't think whipsaw pertains in the case of a small trade but you may view it differently.
Another question was on how we decide what to lighten up on and if there is anything we would buy. It is different every time. Often we are looking to remove volatility but this time removed a holding that had not been doing very well. In an instance where removing volatility is a focus then you would expect that we would reduce exposure to a sector that is typically more volatile than most of the others. For investors who just use broad asset class funds then it would make sense to consider taking defense from their small cap exposure--for investors who believe in defensive action based on whatever criteria they deem suitable.
We would consider buying market neutral funds and inverse funds and did so during the last bear market.
I want to repeat something from above;
bear markets start slowly over several months giving plenty of time to get out
The best thing would be for you to look at charts from past bear markets and see for yourself how this has worked before. This is a normal market behavior which has repeated many times and so I believe in the idea going forward.
Read more!
Tuesday, November 13, 2012
Defense Initiated
Yesterday we took defensive action for most large accounts reducing our net long exposure consistent with our approach of taking defensive action when the S&P 500 breaches its 200 DMA.
This go around was a little different in that we took the opportunity to do some rebalancing, selling of one-offs and for large clients who owned the iShares Global Utilities (JXI), we sold that position--this includes the RRGR fund that we subadvise. JXI has not done very well so we have simply moved on from the name. To be clear we reduced exposure a little but it was also a cleaning up of some accounts too.
For now the slope of the 200 DMA is sloping upward and I think it is pretty clear that they will figure a way to at least kick the can down the road some more on the fiscal cliff issues so I think down a lot is not an immediate prospect but down a little might be. We will take further action a little more subjectively depending on how the market trades and I will disclose what we do here.
Read more!
This go around was a little different in that we took the opportunity to do some rebalancing, selling of one-offs and for large clients who owned the iShares Global Utilities (JXI), we sold that position--this includes the RRGR fund that we subadvise. JXI has not done very well so we have simply moved on from the name. To be clear we reduced exposure a little but it was also a cleaning up of some accounts too.
For now the slope of the 200 DMA is sloping upward and I think it is pretty clear that they will figure a way to at least kick the can down the road some more on the fiscal cliff issues so I think down a lot is not an immediate prospect but down a little might be. We will take further action a little more subjectively depending on how the market trades and I will disclose what we do here.
Read more!
Monday, November 12, 2012
Figuring Out What Really Matters
Barron's had a profile on a registered investment advisor from Connecticut that included the following interesting comment;
Based on who you talk to and the things you read, do you believe it is true that many advisors do not use individual stocks? Generally speaking I believe that most advisors do not use individual stocks and even if I am wrong about the word "most" it is pretty well accepted it is at least "many" who do not use individual stocks.
There are a couple of different messages from this. The simpler message is the extent to which simple investment products allow for building a well diversified portfolio capturing both broad and narrow exposure without having to take on the risk of stock picking which for some number of market participants is not something they want to do. By simple investment product I mean the ETF and OEF wrappers which are easily accessed and liquid.
The bigger point is an approach that focuses less on shorter term performance and more on achieving whatever longer term goals the client has in mind. I think it has been the case that RIAs set expectations that they think they can meet, the client needs to be on board with that or not hire the RIA in the first place and then the RIA either meets the expectation or not. In some instances the RIA outsources the management and the RIA and client together evaluate the manager.
It is human nature to focus on the short term but for most investors the short term is irrelevant to the successful (or not) implementation and execution of a financial plan. As I typically say in this type of post; without looking, how'd you do in the second quarter of 2010? Very few people will know the answer to that because in the big scheme of things it doesn't matter. No one who runs out of money will reasonably take solace from having out performed the market for three years in a row 20 years earlier.
Obviously I am a believer in using individual stocks but they are not right for everyone. The ups and downs of the individual names are more likely to trigger greed and/or fear than any broad based index and probably more than any specialized indexes that underlie niche ETFs. The big picture tie in is the extent to which people do more damage with behavioral issues than picking the wrong stocks.
San Diego State played Syracuse on the USS Midway in San Diego yesterday. It didn't work out that I could go but the pictures from the game were amazing.
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Unlike many advisors, Rafal (the advisor being profiled) still fills part of his portfolio with individual stocks.
Based on who you talk to and the things you read, do you believe it is true that many advisors do not use individual stocks? Generally speaking I believe that most advisors do not use individual stocks and even if I am wrong about the word "most" it is pretty well accepted it is at least "many" who do not use individual stocks.
There are a couple of different messages from this. The simpler message is the extent to which simple investment products allow for building a well diversified portfolio capturing both broad and narrow exposure without having to take on the risk of stock picking which for some number of market participants is not something they want to do. By simple investment product I mean the ETF and OEF wrappers which are easily accessed and liquid.
The bigger point is an approach that focuses less on shorter term performance and more on achieving whatever longer term goals the client has in mind. I think it has been the case that RIAs set expectations that they think they can meet, the client needs to be on board with that or not hire the RIA in the first place and then the RIA either meets the expectation or not. In some instances the RIA outsources the management and the RIA and client together evaluate the manager.
It is human nature to focus on the short term but for most investors the short term is irrelevant to the successful (or not) implementation and execution of a financial plan. As I typically say in this type of post; without looking, how'd you do in the second quarter of 2010? Very few people will know the answer to that because in the big scheme of things it doesn't matter. No one who runs out of money will reasonably take solace from having out performed the market for three years in a row 20 years earlier.
Obviously I am a believer in using individual stocks but they are not right for everyone. The ups and downs of the individual names are more likely to trigger greed and/or fear than any broad based index and probably more than any specialized indexes that underlie niche ETFs. The big picture tie in is the extent to which people do more damage with behavioral issues than picking the wrong stocks.
Read more!
Saturday, November 10, 2012
The Big Picture for the Week of 11/11
We did all the cipherin and figurin and had what we needed to trade loaded and ready to go so it was a lot of work but it would be fine if the work were done for nothing and the market goes higher from here.
I am not worried about not getting the trade done Friday because our objective is to avoid the full brunt of a large decline. Theoretically, if it stayed one point below its upward sloping 200 DMA forever then there would never be a large decline to be avoided. More realistically the SPX will not open down 20% on Monday morning so we will execute our strategy if and when needed as best as we can.
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Friday, November 09, 2012
200 DMA Looms!
US markets sold off late in the day yesterday and in the last few minutes the S&P 500 breached its 200 DMA and closed just below that level. As a function of our strategy and remaining disciplined to that strategy we expect to start the process of taking defensive action in accounts if it looks like the market will close below the 200 DMA for a second day (Friday being the second day).
As a side note, I have said repeatedly that the specific strategy that one uses to trigger defensive action isn't crucial because no single strategy can be the best for all occasions but they can be reasonably effective in protecting against large declines. For example the RBS Trendpilot funds take action after five days below the 200 DMA, Jack Ablin from BMO waits until the SPX goes 5% below the 200 DMA.
In terms of thinking about what sort of defensive action to take, a reason to give the market the benefit of the doubt and not get too aggressive is that the 200 DMA is still sloping upward and likely to do so for quite a while yet. One reason to not give the market the benefit of the doubt is that in terms of normal cycle duration (both for the economy and the stock market) we are late in the cycle. There is no way to no with certainty if we are at the end of the cycle but by definition if it is late in the cycle then it is close to the end of the cycle.
Right here right now there is no way to know if the market is on the verge of going down a lot. We may all have an opinion, or not, and some will be right and some will be wrong. Being right is far more difficult than the simple action of sticking to whatever strategy was laid out before the market started going down. The idea there is that a strategy laid out before the market started going down was done so with no emotion involved. Anyone may or may not have an emotional reaction but the important thing is not succumbing to the emotion, all that needs to be done is to remain disciplined and we all have more control over that than being correct right now about whether this is or is not going to be a large decline.
Hopefully the market will take back its 200 DMA on Friday and we won't have to deal with this now but the important thing is the no matter what we might want we will take action consistent with being disciplined to our stated strategy. I will disclose any defensive action we take on the blog.
Read more!
As a side note, I have said repeatedly that the specific strategy that one uses to trigger defensive action isn't crucial because no single strategy can be the best for all occasions but they can be reasonably effective in protecting against large declines. For example the RBS Trendpilot funds take action after five days below the 200 DMA, Jack Ablin from BMO waits until the SPX goes 5% below the 200 DMA.
In terms of thinking about what sort of defensive action to take, a reason to give the market the benefit of the doubt and not get too aggressive is that the 200 DMA is still sloping upward and likely to do so for quite a while yet. One reason to not give the market the benefit of the doubt is that in terms of normal cycle duration (both for the economy and the stock market) we are late in the cycle. There is no way to no with certainty if we are at the end of the cycle but by definition if it is late in the cycle then it is close to the end of the cycle.
Right here right now there is no way to know if the market is on the verge of going down a lot. We may all have an opinion, or not, and some will be right and some will be wrong. Being right is far more difficult than the simple action of sticking to whatever strategy was laid out before the market started going down. The idea there is that a strategy laid out before the market started going down was done so with no emotion involved. Anyone may or may not have an emotional reaction but the important thing is not succumbing to the emotion, all that needs to be done is to remain disciplined and we all have more control over that than being correct right now about whether this is or is not going to be a large decline.
Hopefully the market will take back its 200 DMA on Friday and we won't have to deal with this now but the important thing is the no matter what we might want we will take action consistent with being disciplined to our stated strategy. I will disclose any defensive action we take on the blog.
Read more!
Thursday, November 08, 2012
We Bought Apple
Yesterday we bought Apple (AAPL) after having reduced our position by virtue of ETF trades a little over two months ago. We executed the trade for "large" accounts, with large being defined as being large enough where mostly individual stocks in 2-3% weightings make economic sense, and for the AdvisorShares ETF that our firm subadvises.
You can read more on the particulars here in an article I wrote for theStreet.com. Not included in that article that we bought early in the day so the average price, relative to the day was not good.
I write regularly about not succumbing to emotion with investing but that doesn't mean there won't be tough days. This trade was planned out when we sold in August when there was no potential for emotion and yesterday we executed a strategy that has worked for us far more often than not. This is a pattern we have traded before where we have sold some form of over excitement and then buy back in when things look less one-sided. This is not the only type of trade we do but is one we have done before, Statoil (STO) as one past example of this.
There was no precise reentry point in mind two months ago but the stock fell a lot in a short period of time and combined with what looked like panic yesterday made for a good time to execute the trade.
Where an actively managed portfolio is a series of decisions some of which will turn out to be right and some wrong. I say this on just about every post that discloses a trade and this one is no different.
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You can read more on the particulars here in an article I wrote for theStreet.com. Not included in that article that we bought early in the day so the average price, relative to the day was not good.
I write regularly about not succumbing to emotion with investing but that doesn't mean there won't be tough days. This trade was planned out when we sold in August when there was no potential for emotion and yesterday we executed a strategy that has worked for us far more often than not. This is a pattern we have traded before where we have sold some form of over excitement and then buy back in when things look less one-sided. This is not the only type of trade we do but is one we have done before, Statoil (STO) as one past example of this.
There was no precise reentry point in mind two months ago but the stock fell a lot in a short period of time and combined with what looked like panic yesterday made for a good time to execute the trade.
Where an actively managed portfolio is a series of decisions some of which will turn out to be right and some wrong. I say this on just about every post that discloses a trade and this one is no different.
Read more!
Wednesday, November 07, 2012
This Was Not The Most Important Election Ever
The reason this is not the most important one ever is because we are very unlikely to have fixed much by 2016 regardless of who won the 2012 election. These events have a natural timeline to recovery or health or whatever you want to call it. For the most part a president can either create an environment that speeds things along some or impedes progress some.
A few years ago I joked about some lucky bastard winning in 2016 and being credited as the genius who "fixed it" although it will have been a right time right place situation. I still think this will still generally be how it evolves but I think it will be more like 2020.
For many months I had been saying that this seemed like 2004 in terms of a weak incumbent that cannot be unseated by the opposing party. I am of the opinion that Romney would have been a little less of an impediment to progress toward "fixing" things but we will never know.
The question now is whether Obama comes more to the middle one way or another in an effort to enhance/improve/build his presidential legacy. While I believe that is the right question, Steve Liesman made an interesting comment last night on CNBC's coverage. He said that he thinks that Obama believes Obamacare and Dodd-Frank make for a positive legacy.
I've spoken to Obama supporters who believe Obamacare is a great plan and I don't know anyone on the right with anything positive to say but assuming Liesman is correct then there is a greater possibility of more of the same which is to say very little gets achieved.
Several months ago a close friend and Obama supporter (although not militant about it) commented to me that the GOP in the house has done everything possible to sabotage Obama by not working with him. My thought on this has been the same which is that the GOP probably has tried to sabotage the Obama presidency by not working with him but I believe that the onus is on the leader to recognize a situation and then figure out how to manage it in order to get things done and that has not happened. Liesman's comment, if correct, implies that he will see not need to move to the middle.
Hopefully everyone in Washington gets religion on the debt and that all Americans realize that making meaningful progress means everyone will have to give up something. Hopefully the government figures out how to do this effectively and actually wants to solve the problem.
Read more!
A few years ago I joked about some lucky bastard winning in 2016 and being credited as the genius who "fixed it" although it will have been a right time right place situation. I still think this will still generally be how it evolves but I think it will be more like 2020.
For many months I had been saying that this seemed like 2004 in terms of a weak incumbent that cannot be unseated by the opposing party. I am of the opinion that Romney would have been a little less of an impediment to progress toward "fixing" things but we will never know.
The question now is whether Obama comes more to the middle one way or another in an effort to enhance/improve/build his presidential legacy. While I believe that is the right question, Steve Liesman made an interesting comment last night on CNBC's coverage. He said that he thinks that Obama believes Obamacare and Dodd-Frank make for a positive legacy.
I've spoken to Obama supporters who believe Obamacare is a great plan and I don't know anyone on the right with anything positive to say but assuming Liesman is correct then there is a greater possibility of more of the same which is to say very little gets achieved.
Several months ago a close friend and Obama supporter (although not militant about it) commented to me that the GOP in the house has done everything possible to sabotage Obama by not working with him. My thought on this has been the same which is that the GOP probably has tried to sabotage the Obama presidency by not working with him but I believe that the onus is on the leader to recognize a situation and then figure out how to manage it in order to get things done and that has not happened. Liesman's comment, if correct, implies that he will see not need to move to the middle.
Hopefully everyone in Washington gets religion on the debt and that all Americans realize that making meaningful progress means everyone will have to give up something. Hopefully the government figures out how to do this effectively and actually wants to solve the problem.
Read more!
Monday, November 05, 2012
Is 10% A Pipe Dream?
Chuck Jaffe had an interesting column titled "Kiss 10% Returns Goodbye" which was about the need for investors to set their expectations a little lower. Roger Ibbotson is quoted that 8% might be more like it.
While the article is worth reading I would add one bit of caution to the discussion. Returns are not linear. The average annual return of the stock market over any reasonable sized sample is a combination of big moves in both directions and small moves in both directions.
This is where we get to how people end up faring worse than the market's average annual return for selling at the wrong time and/or buying at the wrong time without learning from past mistakes. In the past I've mentioned the studies that show numbers like the market averaging 10%, actively managed mutual funds averaging 9% and holders of actively managed funds averaging something like 3-4% annually.
The notion of markets averaging out to a smaller return over time is something I've been writing about here for a long time. The expectation here has never been never ending calamity just a series of headwinds that will result in generally lower but still positive returns, I think 8% for domestic markets is a little too optimistic.
I continue to believe that something close to normal returns can be had from foreign markets (ex-Western Europe and Japan) but to hedge all bets, it wouldn't hurt to save more money.
Read more!
While the article is worth reading I would add one bit of caution to the discussion. Returns are not linear. The average annual return of the stock market over any reasonable sized sample is a combination of big moves in both directions and small moves in both directions.
This is where we get to how people end up faring worse than the market's average annual return for selling at the wrong time and/or buying at the wrong time without learning from past mistakes. In the past I've mentioned the studies that show numbers like the market averaging 10%, actively managed mutual funds averaging 9% and holders of actively managed funds averaging something like 3-4% annually.
The notion of markets averaging out to a smaller return over time is something I've been writing about here for a long time. The expectation here has never been never ending calamity just a series of headwinds that will result in generally lower but still positive returns, I think 8% for domestic markets is a little too optimistic.
I continue to believe that something close to normal returns can be had from foreign markets (ex-Western Europe and Japan) but to hedge all bets, it wouldn't hurt to save more money.
Read more!
Sunday, November 04, 2012
Sunday Morning Coffee
There was an interesting quote from Andrew Low of MIT in Barron's;
While I don't necessarily agree with the entire statement it is the case that personal circumstances trump everything else. There are several points here.
In no particular order...tolerances for normal stock market volatility is a big one. The building block here is probably during normal market corrections and bear cycles and then realizing 2008 was not normal but that type of decline can happen every so often. The answer here is proper asset allocation, some sort of defensive strategy or a combo of both.
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Personal savings rate is very important and at least partially dictated by volatility tolerance. Someone who no matter what cannot tolerate more than a 10% decline is probably going to have a low exposure to equities. This is ok but the tradeoff is a higher savings rate to compensate for forgone growth, the expectation of working longer, a more modest lifestyle than probably hoped for or a combo of all three.
Likely health or lack thereof will be a factor in personal circumstances. My firefighting experiences show that aging and health are very individual things. On medical calls I have encountered people in their 40s and 50s with many health problems. I've also fought fires with guys in their 60s and 70s who were just as physically capable as guys in their 20s. This can be a serious reality check for people and I do not minimize the difficulty but these sorts of issues are a part of a comprehensive financial plan.
People also need to take inventory of their beliefs and how they should factor in to their finances. The easy example is leaving money to children. I've met people who believe it is a moral obligation to leave money to their children and others who believe it is absolutely the wrong thing to do. There is no wrong answer, just a personal belief and there are others too to sort out.
People who are lucky enough to live below their means are going to have an easier time with saving, absorbing financial shocks and being able to take what the market gives. As an example, someone living a $40,000 lifestyle on a $100,000 income can have a very high savings rate, will have an easier time finding income to cover their expenses if they lose their $100k job and is less likely to have to get a certain return. What I mean by that last one is that in the last ten years it was very unlikely to have averaged 10% per year as the SPX averaged 5.5% so anyone planning to retire in 2012 and needing 10% in that last ten years now has a problem.
Figuring all of this out can and hopefully will make investing a little easier, psychologically, as a more suitable portfolio can be constructed such that it takes on the proper amount of risk and volatility.
And as a friendly reminder, if you live in one of those weird states with daylight savings time, don't forget that the time changed overnight (old joke as I live in one of the two states without daylight savings time).
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Buying and holding passive investment vehicles like the S&P 500 is a crude approach to what an investor really cares about for his or her own personal circumstances.
While I don't necessarily agree with the entire statement it is the case that personal circumstances trump everything else. There are several points here.
In no particular order...tolerances for normal stock market volatility is a big one. The building block here is probably during normal market corrections and bear cycles and then realizing 2008 was not normal but that type of decline can happen every so often. The answer here is proper asset allocation, some sort of defensive strategy or a combo of both.
.jpg)
Personal savings rate is very important and at least partially dictated by volatility tolerance. Someone who no matter what cannot tolerate more than a 10% decline is probably going to have a low exposure to equities. This is ok but the tradeoff is a higher savings rate to compensate for forgone growth, the expectation of working longer, a more modest lifestyle than probably hoped for or a combo of all three.
Likely health or lack thereof will be a factor in personal circumstances. My firefighting experiences show that aging and health are very individual things. On medical calls I have encountered people in their 40s and 50s with many health problems. I've also fought fires with guys in their 60s and 70s who were just as physically capable as guys in their 20s. This can be a serious reality check for people and I do not minimize the difficulty but these sorts of issues are a part of a comprehensive financial plan.
People also need to take inventory of their beliefs and how they should factor in to their finances. The easy example is leaving money to children. I've met people who believe it is a moral obligation to leave money to their children and others who believe it is absolutely the wrong thing to do. There is no wrong answer, just a personal belief and there are others too to sort out.
People who are lucky enough to live below their means are going to have an easier time with saving, absorbing financial shocks and being able to take what the market gives. As an example, someone living a $40,000 lifestyle on a $100,000 income can have a very high savings rate, will have an easier time finding income to cover their expenses if they lose their $100k job and is less likely to have to get a certain return. What I mean by that last one is that in the last ten years it was very unlikely to have averaged 10% per year as the SPX averaged 5.5% so anyone planning to retire in 2012 and needing 10% in that last ten years now has a problem.
Figuring all of this out can and hopefully will make investing a little easier, psychologically, as a more suitable portfolio can be constructed such that it takes on the proper amount of risk and volatility.
And as a friendly reminder, if you live in one of those weird states with daylight savings time, don't forget that the time changed overnight (old joke as I live in one of the two states without daylight savings time).
Read more!
Saturday, November 03, 2012
The Big Picture for the Week of November 4, 2012
Yesterday I had an article published at TheStreet.com that looked at the new iShares suite of ten core ETFs. In the article I came around to a point that I have made here before but is worth mentioning again.
The chart compares the iShares Total Stock Market ETF (ITOT), the iShares S&P 500 ETF (IVV) and the iShares Russell 1000 ETF (IWB) since ITOT's inception (the original symbol was ISI). Long story short, iShares suggest a strategy that involves ITOT and IVV (and other funds) to construct a "well diversified" portfolio. I added IWB to further make the point.
The point is the extent to which large cap domestic index funds are going to look very similar even if they track different indexes. There is not going to be any diversification benefit to owning a cap weighted total stock market fund and any sort of large cap fund. ITOT and IVV have the same top ten holdings with similar weightings of those ten. They will always look very similar to each other.
I've seen published portfolios in various places over the years and this sort of duplication occurs frequently. It can happen with other pockets of the market like foreign and fixed income.
Using broad index funds is a valid form of investing and a broad fund will capture a broad swath of the market but as I said in the above linked article owning a bunch of funds that actually capture the same thing makes for ineffective portfolio construction and could create a false sense of diversification.
Read more!
The chart compares the iShares Total Stock Market ETF (ITOT), the iShares S&P 500 ETF (IVV) and the iShares Russell 1000 ETF (IWB) since ITOT's inception (the original symbol was ISI). Long story short, iShares suggest a strategy that involves ITOT and IVV (and other funds) to construct a "well diversified" portfolio. I added IWB to further make the point.
The point is the extent to which large cap domestic index funds are going to look very similar even if they track different indexes. There is not going to be any diversification benefit to owning a cap weighted total stock market fund and any sort of large cap fund. ITOT and IVV have the same top ten holdings with similar weightings of those ten. They will always look very similar to each other.
I've seen published portfolios in various places over the years and this sort of duplication occurs frequently. It can happen with other pockets of the market like foreign and fixed income.
Using broad index funds is a valid form of investing and a broad fund will capture a broad swath of the market but as I said in the above linked article owning a bunch of funds that actually capture the same thing makes for ineffective portfolio construction and could create a false sense of diversification.
Read more!
Thursday, November 01, 2012
Living Well at 95
The New York Times had a lengthy article about a little island in Greece with a peculiarly high percentage of people in their 90s. Based on the article they are not just making it to their 90s they are living active and social lives in their 90s. The article discussed some of the research being done on what these people do, don't do and what they eat.
This has been an occasional topic here even if only covered occasionally. It is no secret that life expectancy has been increasing for many years due to medical advancement and changes in lifestyle. I am an optimist with these things and believe that medical advancement will occur at an accelerating rate. As far as lifestyle changes, I believe society is generally much more aware of the benefits of exercise and how to improve dietary habits (also fewer of us have dangerous jobs like working in coal mines). While that is true it is also true that many people seem to ignore exercise and diet concerns as obesity and diabetes are on the rise in the US.
The lifestyle question here is pretty easy to figure out in terms of certain habits that we know we should do but are difficult to actually execute; the easiest thing in thing in the world to do is to not go to the gym. The concept of all dietary things in moderation is also difficult to stick to let alone a more health-conscious diet. While we're at it, don't drink soda. Another layer to this is staying active and involved with something--having a purpose to keep you mentally sharp. The area where I live has provided many examples of this for the blog to reinforce the concept. I've also mentioned my father quite a few times, he's 86 and always has three or four things going at any given time.
The financial implication is not as easy to figure out. Someone who is 60 and whose parents are alive (this describes my oldest brother) needs to plan financially for being around for a long time. The primary context for this blog is how to think about asset allocation. If inflation averages 3% per year then expenses will go up 50% every 15 years (this is offered as a building block of understanding not a prediction). We all know that some things have been going up much more than 3% and to yesterday's post, there will also be painful one-off expenses along the way.
As a philosophical matter this means not being too early in making meaningful changes to asset allocation. A 60 year old with a high probability of seeing 90 should probably not go from 40% fixed income up to 50% or 60% fixed income. Note that this is about target weightings, not tactical decisions made along the way. The market stays above its 200 DMA the vast majority of the time even in the last 12 years of not making progress. If that continues to be the case in the future then staying with equities will give a much better chance of keeping up with whatever inflation we have.
This is an obvious statement but still worth pointing out for a long term perspective. I know from interactions with all kind of investors in many places that it is human nature to be more short term oriented which leads to getting more bullish after the market has gone up a lot and getting scared after the market has gone down a lot when the best thing is to map out a strategy that has some reasonable basis for working and then sticking to it.
One last contextual point about living past 90, is that the article was about people that age who are actively engaged in their routines and their social circles. Often with these types of articles people leave comments about not wanting to be that old as they envision not being able to do anything anymore but that is not what the Times piece was about.
The picture is of firefighter Rob Verhelst who completed the Iron Man Triathlon in Kona (presumably just the cycling and marathon, not the swimming) wearing turnouts, a helmet and a rack that carries oxygen (SCBA). You can read his story here.
Read more!
This has been an occasional topic here even if only covered occasionally. It is no secret that life expectancy has been increasing for many years due to medical advancement and changes in lifestyle. I am an optimist with these things and believe that medical advancement will occur at an accelerating rate. As far as lifestyle changes, I believe society is generally much more aware of the benefits of exercise and how to improve dietary habits (also fewer of us have dangerous jobs like working in coal mines). While that is true it is also true that many people seem to ignore exercise and diet concerns as obesity and diabetes are on the rise in the US.
The lifestyle question here is pretty easy to figure out in terms of certain habits that we know we should do but are difficult to actually execute; the easiest thing in thing in the world to do is to not go to the gym. The concept of all dietary things in moderation is also difficult to stick to let alone a more health-conscious diet. While we're at it, don't drink soda. Another layer to this is staying active and involved with something--having a purpose to keep you mentally sharp. The area where I live has provided many examples of this for the blog to reinforce the concept. I've also mentioned my father quite a few times, he's 86 and always has three or four things going at any given time.
The financial implication is not as easy to figure out. Someone who is 60 and whose parents are alive (this describes my oldest brother) needs to plan financially for being around for a long time. The primary context for this blog is how to think about asset allocation. If inflation averages 3% per year then expenses will go up 50% every 15 years (this is offered as a building block of understanding not a prediction). We all know that some things have been going up much more than 3% and to yesterday's post, there will also be painful one-off expenses along the way.
As a philosophical matter this means not being too early in making meaningful changes to asset allocation. A 60 year old with a high probability of seeing 90 should probably not go from 40% fixed income up to 50% or 60% fixed income. Note that this is about target weightings, not tactical decisions made along the way. The market stays above its 200 DMA the vast majority of the time even in the last 12 years of not making progress. If that continues to be the case in the future then staying with equities will give a much better chance of keeping up with whatever inflation we have.
This is an obvious statement but still worth pointing out for a long term perspective. I know from interactions with all kind of investors in many places that it is human nature to be more short term oriented which leads to getting more bullish after the market has gone up a lot and getting scared after the market has gone down a lot when the best thing is to map out a strategy that has some reasonable basis for working and then sticking to it.
One last contextual point about living past 90, is that the article was about people that age who are actively engaged in their routines and their social circles. Often with these types of articles people leave comments about not wanting to be that old as they envision not being able to do anything anymore but that is not what the Times piece was about.
The picture is of firefighter Rob Verhelst who completed the Iron Man Triathlon in Kona (presumably just the cycling and marathon, not the swimming) wearing turnouts, a helmet and a rack that carries oxygen (SCBA). You can read his story here.
Read more!
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