Maybe Twin Peaks is a little off topic for this post. Anywhoo...There are currently a lot of distortions and dislocations in the capital markets these days and it is important to recognize them for what they are.
For example, the dollar rally. From mid July through Monday the dollar, as measured by the Dollar Index, was up close to 7%.
Regardless of whether the oil decline is the reason, weakness in other currencies, other things, all of the above or none of the above, 7% in less than a month should not be expected to be a sustainable move.
Even if July 2008-July 2009 turns out to be another 2005 (the dollar was up that year) the move of the last month is too big for this market and based on how this market works, it should work back down at some point. This is not a dollar bear argument (I am a longer term dollar bear) but is simply meant to point out that moves that occur with extreme velocity (relative to what is normal) often go back the other way even if just temporarily.
Oil is another one. Many have opined that a part of the decline can be attributed to demand destruction. Maybe this is true but the case for demand destruction would be easier to buy into if the oil price had eroded and no one thought the bubble had popped. But instead oil has panicked down in such a manner that it is difficult to think it has accurately captured a change in behavior.
We could talk about a lot of the commodities, ag stocks and currencies in a similar vein but you get the point by now.
The point from me is not to load up on these things, I am a believer in moderate weightings, but to the extent you use any of them to supplement your equity exposure, but to not get shaken out when they hit an occasional air pocket. If you diversify with some alternative stuff (and again I only use a little) you should realize it won't always go up but that does not mean it is all of a sudden a bad idea.
I'm not sure what to tell someone who is 25% commodities.
With regard to why you invest, presumably you want to have enough money for some purpose in the future (like not running out of money after you retire), these things are noise. All of the asset classes mentioned, and ones not mentioned, have all had more puke downs or panics up than we can remember and will have many more in the future.
The big run this decade in resource related themes combined with our decade long round trip to nowhere for domestic stocks has perhaps skewed our thinking but from 30,000 feet, markets work a certain way over long and short periods of time and expecting these sorts of things work out roughly the same way is the better bet the vast, vast majority of the time. And for most folks the short term distortions and dislocations can and should be ignored which is easy to forget if you watch and read too much of the wrong thing.
The long term distortions and dislocations do, as a matter of philosophy, need to be heeded but other folks say no. By long term I mean things like the yield curve or exit strategies and so forth.
We are all confronted by short term noise that we need to filter. A big chunk of the filtering needs to be having a plan, sticking to it and knowing your plan won't the best approach for all times but if it is well thought out, you stick to it and you save properly you have a good shot of getting where you need to be.
7 comments:
Thanks for the pep talk, Roger. It's hard for me not get shaken out of positions in a diversified portfolio. Something's always down when hopefully something else is up. I'm trying to focus on the total port (and not my position in GLD this week) and use dislocations as opportunites to buy or take profits. Easy to say but tough to do.
not so easy to think in these terms but if the bottom line does what you hope, that is far more important than whether any given holding does great or does lousy.
All of the alternative investments I follow, including managed futures have dropped below the 200 day MA. I also own an anternative asset allocation fund only out since march 2008. Seems the commodities bubble burst has been a major reason. Tough when you buy these for some down market support. Where's the support? Time to bail on them?
anon 8:26,
that is exactly the question i am trying to answer. These things are down over the last month give or take and equties are up give or take.
seems to me they are zigging v the market's zag, no?
a point i have tried to make with this stuff is that if you go too far (and too far is in the eye of the beholder) you end up with a portfolio of alternative assets hedged with a little in equities.
looked at over the long term i think reducing the bottom line volatility a lot while demand for equities is unhealthy is a good way to go agian long term. this means that short term you will lag feel good rallies.
Here is a chart with a few compares.
http://tinyurl.com/65aqwn
Only 6 months but not what I expected, too much correlation, don't you think?
the last month the correlation looks negative. the far left of the chart the correlation looks negative.
they lagged the feel good rally from march to may which is not a shock.
they went down in unison from early june to early july.
if you are the same person that has left a couple of comments about this then the funds are obviously troubling to you, i would ask if you maybe own too much relative to what is appropriate for you?
these funds appear to have zig versus spx zag most of the time.
yes Roger, the same guy and am a bit troubled. Only have 4% of total portfolio in RYFOX. The fund was down only (.12%) today but RYMFX was down (1.24%), more than S+P 500(.29%)
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