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13 comments:
Hi Roger, enjoying your site for a month now. Read the article, and IBD also uses 8% trailing stop as one of its rules.As a rank amateur investor,it seems one must draw the line in the sand somewhere. As
a recent qualifier for AARP, I "manage" my own port. with a moderate allocation of 60% ETF + MF stocks, 25% LSBRX (bond MF), and 15% cash. Any thoughts about sector weighting principles, and sell disciplines that seem to work over time would be appreciated. Also, if anyone has used IBD's Canslim has opinions re same. Gracias, Stefan in Fountain Hills,AZ.
Enjoyed the ETF/Hedge post. The author says almost the same things I mentioned in the NYT piece weeks ago.That is probably why I enjoyed it.
ETF's are a wonderful way to hedge into more speculative investments to provide zest for your securities portfolio(s).There is something for everyone, and the ETF list just keeps growing.
That said,I agree with your oft-repeated view that individual stock selection should also be a significant part of the mix.
steve.scoot:
I knew an estwhile portfolio manager that attended O'Neill workshops and began, with private equity, a fund using the Canslim method in 2000. It went bust after about a year. $6M down the drain. He tried to solicit me with a glitzy prospectus and Canslim testimonials. As a friend, I gave him my list of stocks (no money) at the time and advice - don't put all your money in one system. He is still a friend and now jokingly refers to Canslim as a "money diet that works". His wife, who threatened divorce at the time of the collapse, handles the finances now. My friend is a member of the large and ever-expanding ranks of beaten-down husbands.
Hi Roger,
When you talk about your exit plan being based on the market 200d ma but also talking about having a broadly diversified portfolio, I am trying to correlate how the two would work together. It seams like a small indicator being compared to a large base??
Thanks
> don't put all your money in one system.
Good advice T - which begs me to explain my investment approach.
I believe in strategy diversification. Everything we know, or think we know about investing may not work so well over the next 20-30 years. Why bet your entire portfolio on one way of doing things?
I try to practice what smartest people have learned about investing and the markets. I don't have a degree in finance or mathematics, but I'm smart enough to learn from guys like Eugene Fama and Josef Lakonishok.
I currently use two investment strategies (my assets are divided equally between both) and I'm starting on a third strategy.
The first is a lazy, buy and hold portfolio - broadly diversified, roughly 80% equities, 20% bonds - and every equity asset class imaginable: large, small, growth, value, international, emerging, etc. If the EMT guys are right, and they do have a ton of evidence on their side, active management is just an expensive waste of time. If history is any indication of the future, a broad-based low-cost portfolio of indexed investments will probably beat the pants off 75% of the active managers out there. Now, there is a remote possibility the world ecomomies will go into a massive depression over the next 20 years...or just stagnate. And equities will do no better than tread water, but I'm fairly certain that this won't be the case. If you have the slightest inkling Fama, French, Graham, Malkiel, and Bogle are right, I think it makes sense to bet on diversified B&H strategy for at least a portion of your overall portfolio.
Strategy 2: Momentum is a "persistent anomaly" that's been extensively documented over the past 20 years by folks like Chan, Jegadeesh, Lakonishok, Davis, Rouwenhorst, Moskowitz, Grinblatt, etc. The concept is counter-intuitive, but it works. Stocks, sectors, countries, asset classes (pick what you will) that performed best during the past 6-12 months will continue to out perform in the subsequent months. There are literally hundreds of different approachs on how to execute a strategy based on this research. Granted, my approach may sound a little complicated - mainly because I use a timing overlay, but the basic idea is quite simple.
So what if momentum anomally goes away over the next 20-30 years? That's entirely possible - the small cap effect failed for several decades and value investing looked idiotic in the 90s. If the effect fails I'll just have a chunk of my investments in less-than-diversified portfolios.
And what if the market marches straight up over the next few decades - with no sizable corrections and no bear markets? Or what if stock markets stop trending altogether - the charts start looking like an EKG after a defibulator shock? Won't market timing be a huge drag on returns? It's entirely possible.
Every investment philosophy/method I've ever read about has looked idiotic at some point in history. Go back and read the disparaging articles about "buy and pray" investing in 2001-2002. Guys like John Hussman looked like geniuses then. Did Hussman look like a genius in 2004? 2005? 2006?
Scoot, my starting point for sector weighting is the makeup of the S&P 500. With each of the ten I decide to over weight or under weight each sector based on what I think is going on with the stock market cycle and economic cycle. I also allocated to an eleventh "sector" I call other for things like a REIT, MIC and other items not easily categorized.
Anon 6:08, the way I view things, the S&P 500 going below its 200 DMA is an indication that there is a problem with demand for equities. The problem may or may not be serious and I may or may not be able to figure out the problem but I view it as a problem nonetheless.
I take this as a catalyst to start decoupling from the market. There are times to look like the market and times not to. Depending on the circumstance I may sell some stock, buy an inverse fund or both.
The important thing is that I do this gradually in case I turn out to be wrong, which has been the case 2 or 3 times in the last few years, and because bear markets start slowly over a period or months, not with a bad week.
Hi again,
Per an article written by Don McDonald entilted "Out with the Dow" on the www.fundadvice.com site:
..quote..
I propose that for our new market barometer we adopt the Dow Jones Wilshire Global Total Market Index.
This index was created in 1991 and consists of almost all of the stocks traded on 56 world markets (more than 98 percent of the total value of the world’s equity markets).
..unqoute..
Whats the values or traps to using something like this.
Thanks
Models this week:
Timing model = -1.0
30% long, 70% cash
Allocation of long postions:
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
U.S. Sector Top Ranks
U.S. Real Estate 5.5
U.S. Basic Materials 5.0
U.S. Utilities 4.0
U.S. Leisure Goods 3.0
Mid Cap Value 3.0
U.S. Telecommunications 3.0
U.S. Oil & Gas 3.0
Top Intl ETFs
MSCI Malaysia Index Fund 3
MSCI Sweden Index Fund 3
MSCI Singapore Index Fund 3
MSCI Germany Index Fund 3
MSCI Mexico Index Fund 2
MSCI Australia Index Fund 2
FTSE/Xinhua China 25 Index Fund 2
MSCI Spain Index Fund EWP 2
MSCI Pacific ex-Japan Index Fund 2
S&P Latin America 40 Index Fund 2
MSCI South Africa Index Fund 2
MSCI Austria Index Fund 2
MSCI Netherlands Index Fund 2
Top countries, asset classes, sectors
MSCI Pacific Free ex-Japan Index 3.0
FTSE/Xinhua China 25 Index 3.0
S&P Latin America 40 Index 3.0
Dow Jones Wilshire REIT index 2.0
MSCI Emerging Markets Index 2.0
One thing to note here is the slow rotation...if there is any. Not a whole lot has changed over the past few weeks. I like using multiple rates-of-changes to measure momentum because it helps to minimize volatility in the rankings and that is evident here.
My timing model is in a interesting place right now. It reminds me of little league baseball - running different scenarios through your head before each pitch. One thing I'm watching closely is my shorter term trend indicators:
http://tinyurl.com/28w392
http://tinyurl.com/2h8l8w
If one or both go positive, I will be adding to long positions.
On the sentiment front, Goefert's smart/dumb money spread is close to OS territory - his intermediate model is already extremely oversold. This is encouraging. Although sentiment indicators can stay OS for several weeks, it's usually a good idea to start buying when fear is prevalent. If the smart/dumb money model moves into OS territory, I'll be adding to long postions.
My hunch is the market will retest the lows next week, but you never know. I'd be surprised to see the equity markets simply resume the nice upward stair stepping they started last summer. Bottoms are usually ugly and volatile. The market rarely does a single spike down before it resumes it's upward course.
Btw, don't forget the long term trend is up.
tomk: Would you mind describing how you calculate your rankings?
And, did anyone see this article in the nytimes? 'nough to make me fear the big is gonna fall. Then again the media sans cnbc likes to talk about fear.
http://www.nytimes.com/2007/03/11/business/11mortgage.html?_r=3
&pagewanted=1&hp&oref=slogin
“The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,” said Josh Rosner, a managing director at Graham-Fisher & Company, an independent investment research firm in New York, and an expert on mortgage securities. “This is far more dramatic than what led to Sarbanes-Oxley,” he added, referring to the legislation that followed the WorldCom and Enron scandals, “both in conflicts and in terms of absolute economic impact.”
Re the comment in the NY Times: If significant disclosure and lending standard regs do NOT come of this stupidity, then I would say that we ought to disband government entirely.
Now who is really getting fleeced--the poor schmucks that bought these debt obligations (they're secure! Hah!) under the guise of one risk rating when in fact they are something different.
I suppose that the underwriting in the prospectus would determine if there is any recourse to the originators (I don't claim to know much if anything about the terms). All of the people in the food chain have made their money, and it will be the holders of these notes (and holders of the loan receivables if they've not been repackaged and sold) that will pay the price of this chicanery.
lots of great stuff here, thank you.
as far as DJ Wilshire Global Total Market Index...gotta ticker symbol?
http://peterdag.com/s_files/mLcn829S3eP2.pdf
One of the subscriptions that I get is Peter Dag, written by George Dagnino. He makes sector weightings and stock selections based on his understanding of where we are in the economic cycle. The above link is a good explanation of sectors that perform well in particular business phases that some of Roger's readers might be interested in as they look at their portfolios.
Great post guys. I enjoy reading Roger's blog and watching the videos each week.
Hi Roger, here is what i found:
Dow Jones Wilshire Global Total (^DWGT)
Dow Jones Wilshire Global Total (^DWG)
http://www.djindexes.com/wilshire/global/docs/gtmi-rulebook.pdf
http://www.djindexes.com/wilshire/global/index.cfm?go=key-benefits
Dow Jones Wilshire Global Total Market Index (GTMI).
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