Declines followed by recoveries and new highs is just how it works. It may take longer than you would like, but it does happen. Embracing this simple truism should reduce the emotional toll that declines take.
Personally I have unyielding faith that cycles are normal, they tend to end in a similar manner, start in a similar manner and doing a few simple things within a portfolio can help buffer the impact. Obviously there is no guarantee and there people who should not attempt to take defensive action.
I have been writing about some of these basics for months as I have implemented them. One thing that is true, I have tried to make this point countless times, is that if is turning out to be a bear market it is happening slowly. For now the market topped out two months ago, with the decline thus far still in the realm of down a little it is not too late to take defensive action if that is appropriate.
Over the last few months or so I have reduced volatility by selling and reducing a couple names, added a little double short here and there and tilted toward sectors that tend to do better, like staples, in recession or bear market.
I also write often about moderation which applied to being defensive too. I think 100% cash is a very aggressive position. Just as bear markets tend to start the same they also tend to end the same. Whether this is just a dip or really is a bear market there will be a fast and furious rally and if you are 100% cash (or some other extreme number) you are in a situation where you have to correctly guess when that comes which is not a bet I want to make.
Lagging a monster rally while erring on the side of caution is not a problem like missing a monster rally is.
On a much more important note, Prescott (the town where I live) is getting its second pro sports team. Last winter we got minor league hockey and this spring we are getting an indoor football team, the Arizona Adrenaline.
19 comments:
Thanks for the review of market cycles and results. It is hard (for me. maybe others?) to see account balances suffer and still enter the holiday season with joy.
Especially knowing that the executives at big financial firms--that caused the credit crisis--will still be very rich while the rest of us lose.
Thinking about the longer term mitigates the frustration a little.
compensation issues bring up another point; span of control.
there is not amount of effort you can exert that will change that reality.
because of this truism i find it best to not worry about these issue.
Boy, do I ever agree with slmasker!!!
For anyone who wishes to read a bit more on market cycles and get some practical defensive recommendations, I've found this site to take a commonsense approach, much like Roger does:
financialphilosopher.typepad.com
May Santa not forget the Fed and the ECB.
Thanks for the advice, Roger, and I agree with your opinion about the downside of all in/all out timing and
the defensive posturing including double shorts.
I have been getting defensive ( not personally) and
have raised more cash, bought some food staples,
and increased SDS. Yesterday, even the staples and
utilities got slammed, though. I made the mistake
of buying DBU last week with a 10% stop, estimating
that range of volatility for foreign utilities. Well,
i got stopped out yesterday and it is up about 4% today, so my take is that foreign holdings, even in so-called defensive sectors tend to
be much more volatile than US. Am I right?
scoot, I am not sure an especially volatile week in an overall period of increased volatility serves as a useful microcosm for drawing that conclusion.
Someone sold a lot DBU. Volume was over twice as high as normal.
I think ETFs require you to be more careful. Setting stops with something that has such a low volume can be dangerous.
Thanks. I read an interesting article by an economics professor who grades his end of year investment class like this: (percentages relative to the SPX). By his standards there are a lot of professionals who are
getting some poor ytd grades. Scoot
A= >5%
B= .25-5%
C= .25- to -.25%
D= -.25 to -5%
F= <5%
i can only imagine some of the trades put on by those class members entering their final 2 weeks of the class down3-4%!
If he was teaching an MBA class the % would relate to expense ratio's for their mutual funds...future scumbags of america. Ho Ho Ho.
I don't think stop-loss positions ever make sense for broad equity and ETF markets. You will, at some point, be more than 10% down from your purchase price in any long-term investment. If you are not willing to take that risk, you will sacrifice a great deal of your upside as well.
Also, to ditch a mutual fund or investment strategy due to one sub-par season is the height of self-defeating and trend-seeking behavior.
I'm not sure I can agree with Jag's pov.
The description and context of "broad equity and ETF markets" implies that only a "buy and hold" strategy is appropriate for those instruments.
But this begs two questions: in maintaining and monitoring portfolio allocations (an accepted use of those instruments), at some point you will either need to rebalance, or your view will change as to optimal allocation. Second, if you enter a position without some guideline for an exit, you're running the risk of having the short-term context define your decision (sort of a "I'll know it when I see it" subjectivity).
When I have a volatile position, I cannot as confidently rely on my "in context" judgment to determine if the current move is daily volatility highly subject to correction/reversal, or the crossing of some actual boundary that I would have established using "pre-context" judgment.
To avoid emotional decisions, the "pre-context" judgment (establishing boundaries before I'm in the middle of a wild ride) at least biases me towards the objective.
(This is, in some ways, just basic statistics, as captured in the "Bollinger Band" approach; if it moves to here, it's within the expected volatility, or, in stat terms, the observation is not beyond n std devs of the prior expected population's mean - and if it is beyond [some line/stop loss/# St Devs] I have to rethink the assumption that generated the mean expectation.)
For me, not using (wide) S/l's leaves me vulnerable to all sorts of "in context" rationalization as to why this (previously considered extreme event signaling a need for change) should be ignored... and I ride the position straight into loss territory.
Just my view.
RM
"Rick, I don't wanna touch the iguana."
Fairly obscure pop culture reference.
First, unfortunately Scoot just got whipsawed. Obviously this happens now and then.
The important thing here is discipline and for some folks stop orders is the best way to be disciplined and for some folks not.
I don't think Jag's post pertains to Scoot's trade in that DBU is narrow based. I generally agree that stops are not ideal for broad based products but that is just me.
If I used broad-based funds only I would never want to sell out the entire thing (stop or otherwise) as going to zero on an asset class is a bad idea for most folks.
I am differentiating from the example where you have an emerging market fund and then decide at some point that another EM fund is a better mouse trap.
dbu (along with plethora of other wisdom tree funds) went ex-dividend yesterday. it gapped down right below the 50 day MA. my guess is that a bunch of people had stops right around that level and that caused the selling to cascade and hit more stops begetting more selling...
i am a firm believer of stops but not of stop orders. i usually exit my position the day after it firmly closes below my target stop level.
Roger what is your take regarding EXB-a new international exchange ETF. thanks
I wrote about EXB for TSCM or RealMoney a while ago. it has done relatively well probably thnaks to the exchanges. because of the IB exposure I would rather just buy an exchange stock but it is faring quite well.
Roger wrote twice about “Claymore/Clear Global Exchanges, Brokers (EXB)”, a while back. The links can be found here:
http://tinyurl.com/2annc7
http://tinyurl.com/yv3uby
wow nice detective work
Elementary, my dear Watson.
It is welcome to read a logical blog in the midst of the mainstream news media's panic headlines and the political huckstering so common with the party out of power in a Presidential election cycle.
Taking the long view is not only therapeutic, it is a much better way of making money in stocks and bonds. Having the market dictate your emotions on a daily basis is neither healthy or profitable.
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