I am in no way passing judgment but I do find this interesting. There is a lot of money out there that just uses ETFs. It will be interesting to see if these types of managers find utility in the newer ETFs that seem to list by the dozen these days. I hope they do in that if ETF innovation is rewarded with volume we may see ETF providers become more and more creative, naysayers notwithstanding.
Barry Ritholtz republished a nine point investment plan by Scott Adams, the Dilbert cartoonist.
1. Make a will
2 .Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
As it is just an opinion people maybe inclined to pick on certain points made but I think it is very useful for its simplicity. When possible I try to gravitate toward simple. Capturing equities in three or four broad ETFs is perfectly valid and for some folks it is the best way to go. Obviously I tend to think a diversified portfolio needs to have a few more moving parts than that which is why I manage they way I do and write about what hopefully seems like a wide range of investment themes.
A reader has left a couple questions as an attempt to better understand this pairs trade idea I have been kicking around lately. The reader expresses a concern about "free lunch." While something could certainly go wrong the goal of the trade is to deliver an outcome that lags the market and at no time in the exploration of this have I thought it was riskless. If the items paired have correlation between -0.90 and -1.00 it seems highly unlikely that both things could go in the same direction. I laid out a scenario in the comments where maybe both the long and the short decline slightly in a flat environment.
The reader then asks if the new inverse sector ETFs would pay a dividend, how important the dividend is and whether just being in the money market would be better.
Last one first; I don't know which is the point of the study. I was able to create one backwards looking example that clearly beat the money market. The RWR/SRPIX pair returned about 2/3's of the S&P 500 Index and the dollars at risk, when the two are combined, was almost nil. Looking forward there is no way to know if the concept could ever work again but I think it can.
I would not expect an inverse fund of any sort to pay a dividend although it happens every now and then.
The dividend paid by the long is very important to the theory. The idea is to pair two things that are highly correlated from the same part of the market. The hope is the long (like maybe an "intelligent" indexed product) out performs the short (like an indexed product with no enhancement) and hopefully the long out-yields the short, or better yet with an inverse fund any dividend paid is by debiting fund's NAV not your account.
For now don't lose sight of the fact that this is just a concept I am exploring. I have committed no money, there is not much selection for inverse sector funds (OEFs three I think, ETFs none). This is the early stages of an idea and anything I have posted so far is simply thought process.
3 comments:
The Dilbert list is not flawless, but compared to the heinous errors I see all the time, you could do a lot worse.
Indeed, its better than 90% of wehat isee in-duh-viduals end up doing . . .
The nine points were good. I would add a few:
>educate yourself to the fullest.
>create multiple income streams through work and active investments such as real estate and a second job you treat as a hobby.
>marry correctly...the first time.
>worship a God other than yourself.
I have now complicated simplicity.
As Barry said, it's 90% better than what most are doing.
Without going into the whole list, a will is pretty empty as a stand alone. It should be combined with a medical power of attorney under a Family Trust.
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