There are a handful of world class investors whom I will go out of my way to see, hear or read. One of these heavyweights is of course Oscar Rogers. I have not seen anything from him in a while, this link is from late October and I believe is his latest public commentary.In that clip he gives an impassioned plea for them to fix it.
I think Oscar might be on the verge of throwing in the towel despite this article from the NY Times saying that diversification does still work and that investors should not give up on it.
The idea was simply that in a short term, panicked flight to safety yes everything goes down but the proper mix did go down less. The article never mentioned any sort of defensive strategy like the things I write about. It is no shock that an MSM article would omit such an idea but as mentioned in this week's video hopefully you did something along these lines in the current bear market or have learned to for the next bear market.
I still believe in diversification. The notion of how to construct a diversified portfolio is evolving however by necessity and thanks to new investment products (not all new products are bad even if a lot of them are flawed). A few of my recent articles for TheStreet.com and a couple of posts on the blog have tried seek out different ways to structure portfolios to have much less risk and reward which of course means the need for a much higher savings rate.
The inspiration is that this decade will cause people to want to give up on the stock market. Well anyone wanting to give up still needs to save and get some sort of return on their savings even if a "normal" 70/30 allocation is not how they will do it.
One idea I'm trying to pull together for an article is along the lines of picking six or seven asset classes (including cash), picking one or two broad based funds for each one and from more of a bottom up tactical strategy entirely sell out of a fund (asset class) that goes below its 200 DMA, or any other defensive concept, and go back in when it goes above. While you are out you are out, not chasing into something else. I imagine this concept would have gone into cash asset class by asset class over the last however many months and now be 100% cash or close to it.
The asset classes might be;
- Domestic Equities
- Foreign Equities
- Commodities
- Domestic Bonds
- Foreign Bonds
- Inflation Protected
- Absolute Return
- Anything else you can think of
For domestic equities, for example, this strategy could use the Russell 3000 Index Fund (IWV). It went below its 200 DMA last December. So the idea is to have sold when that happened and then just wait until it goes back above. Obviously it sill has not gone back above so that part of the allocation would be in cash. Obviously most of the different segments would have gone to cash a while ago.
This is obviously not that original on several levels but for someone on the verge of giving up there is not that much work. Pick one or two broad based, index-like funds for each segment, set up something to alert you when each holding breaches its 200 DMA and check your email. The funds used would ideally just be a proxy not an attempt to add value versus a proxy. IWV is the US market, something like iShares Aggregate Bond (AGG) is the bond market and so on.
One issue, and there are many, is that IWV is about 40% below its 200 DMA which is a lot of potential gain to give up. While that is a drawback the 200 DMA is headed lower and in another couple of months or so the slope down for it will steepen dramatically and so a crossover could occur long before a 40% rally, or not.
As a reminder this concept would be aimed at people that want to give up but know they can't and I assume that if you take the time to read a stock market blog people that want to give up does not include you. So while there are flaws galore it is better than nothing.
28 comments:
Wow, you're not drinking decaf today, are you! A thought-provoking post on many fronts, thanks.
You've referenced Mebane Faber's work along these same lines in the past. Are you proposing something different here? One difference seems to be more asset classes; I think he only used five?
Personally, I'm a fan of this line of thinking. One downside, as you mention, is the potential to lag on the way up. I'd love to see mechanical signals added on when to get back in earlier (like the 50dma) and when to take some profits without going to 100% cash. I suppose tools like Bollinger bands might help, but that starts to complicate the system.
I enjoy your posts on portfolio strategy, Roger, and I hope you can pull an article together. Thanks again.
I nominate your last 2 posts as your most helpful ever. Keep it coming.
Stupid me thought Oscar Rogers was some market guru I did not know about.
We would all love to be able to select the optimal portfolio in advance. None of can, unless by pure chance. History is the only guide to what would have been the best combination. Who knows, the best asset class might be Ostrich feathers (again). Is that part of your portfolio now? Seems ridiculous.
By the way, interesting articles in WSJ lately regarding university endowment funds returns. Complex, sophisticated, blah blah blah ain't better than Vanguard index funds.
Seems to me, Graham has it right. High quality equities balanced with high quality fixed income. Heavy on equity proportion in times like these, light on equities in time like 14 months ago. Doesn't seem so difficult. And then get on with your life.
Roger, intriguing way to improve on a hands-off portfolio.
1) simple -- can be summarized in a couple of lines,
2) avoids extremes -- reduced chance of buying in at the top or selling at the bottom,
3) cheap -- at most a couple of moves per asset class per year, even with whipsaws
--Jeff
Paragraph 4 mentions, "but the proper mix did go down less". Whose words are proper mix? What was the proper mix then and what is the proper mix now? Seems like it "depends" on ability, willingness, and need to take risk.
The next paragraph you mention, "structure portfolios to have much less risk and reward ". What is your definition of risk? Is it the standard deviation of the expect return of the assembled portfolio or something different? For me, excessive risk is a portfolio that cannot sustain my lifestyle in perpetuity, the risk of inflation adjusted returns coming up short. There are some who can achieve that goal now by investing exclusively in TIPS.
To some, excessive risk is not having bragging rights at the country club.
What is the nature of the conversation with your cleints when the topic of risk and asset allocation comes up?
Roger, could you elaborate some? I am very interested in your views on these matters.
LOL....very funny Roger
we need a laugh.
Fix it British Style:
http://tinyurl.com/6rcjup
Happy Holidays!
http://tinyurl.com/495wc
I guess I'm kind of dumb, could someone please point out the humor?
Anyone aware of a system that will email you when falling below 200 DMA?
Nevermind, wathed the video and see the "humor" now.
anan 10:18
Back from a cold weather hike, lots of comments.
anon 651, obviously there are plenty of tweaks that would improve the basic premise, I will note however this far below the 200 DMA only happened in one other period (as I understand it ) which was sometime during the depression.
The Oscar Rogers bit is pretty good in capturing anguish and for being void of all logic and rational thought.
Anon 8:07, maybe I should have added beef jerky or ivory soap as asset classes, lol. the intention is not optimal anything. these are some asset classes that make sense in terms of just covering the bases, there is no real looking back or forward in this post just covering bases.
anon 10:05 yeah that was kind of vague. the NYT piece had some different examples of allocations and how they did.
My definition of risk in this context is simply to take on the risk characteristics of a normal equity portfolio allocating 60-75% to equities which seems to be what the vast majority target.
Conversations with clients has been relatively easy because just like with the blog we started talking about a bear market will come because that is normal, when it comes this is probably what it will look like and if it comes this is what we will do. It then all unfolded as advertised and we did what we told them we would do and I think most clients were at least somewhat prepared.
A scary thing is a little less scary if you are ready for it.
Black Libertarian, I believe several of the online brokers have something along these lines also i recently beta tested something called Alerts4All (google it) that might also do the trick.
I'm just a layperson, so I offer this as nothing but a peanut gallery comment. . .
As markets fall faster than they go up, I'll posit that the 200dma might not be a good bell weather for going into the bunker--in that the bear market blast is liable to cause one to lose an appendage or two (something that you'll miss) and likely leave you hairless from the singe. Rather, a weekly or monthly crossover combo might make sense in giving one a heads up that the trend is changing.
I know that John Murphy favors using the 13/34 combination and applying that on a daily/weekly/monthly charts.
I still think that sector allocation makes sense rather than going with wholesale index (S&P, etc). There was more than a one year lag between when financials petered out and commodities. I've had good luck in watching the DJ sectors and observing their topping out and then subsequently falling to their death (or just temporary disability).
Given the heavy weighting of the financials in the S&P (PREVIOUSLY!), signals applied to the index, could be misleading with respect to holdings in other sectors. While I know that there are many successful models to choose from, given the syncopation/synchronization of sectors to the economic cycle, I think that for they way that my overtaxed brain works it makes sense to over/underweight sectors in accordance with this cycle.
As correlation increases, it would seem that the value of using multiple asset classes would decrease. In an exceedingly unscientific experiment, I charted VTI (the Vanguard everything ETF) against a number asset class ETFs and could see little advantage in adding the complexity of multiple asset classes except in the shorter terms where something like FXI gets red hot. Maybe if the real question is do I want to be exposed to equities based on a signal be it the 200 day MA, 13/24 cross over, or something else, it makes more sense to reduce your portfolio to one holding, everything.
Has anyone really looked at this? Does diversification through individual multiple asset classes really add value over a single diversified product?
Further to Leisa's post, I suspect that some sectors broke their 200 dma earlier than the S&P 500. Financials would seem to be the obvious tell this time, though I haven't looked. The inverted yield curve was another tell for anyone who took action then. A historical look at market returns using some different indicators would be interesting. Someone (Eddie Elfenbein maybe) claims that all or most of the market's gains come when Congress is out of session.
The banking index had a 50 day cross over of the 200dma in July of 2007. The S&P's 50/200dma crossover happened in 12/07. The CRB index crossed in 09/08--more than a year later for the banks and some 9 mos later than the regular index.
The last index to break down was the biotech. I like to watch the sectors and then scout around for long/short opportunities. FINVIZ is a great resource (FINFIZ.com) for finding tickers by industry/subsector.
I'm convinced that it was massive selling by leveraged hedge funds that really accelerated the downside panic in the market. It's too bad there's not an aggregate hedgie index ala the S&P that small investors could monitor for defensive signals.
Having been through some nasty bear markets in 70's, 80's, 90's and 20's and not getting any younger, so my strategies must change. I will move toward a 25% equity 75% fixed income and the next time the market moves from being above 200 day ma to below 150day ma I will go to a 10% equity position. At that time I will decide where. Damn diversification. I have work to do.
Over-leverage is ALWAYS the reason for market panics throughout history. And what we've witnessed is systemic risk among the banks, insurance companies and hedgefunds--all of whom were overleveraged. Not only were hedgefunds forced to sell, but banks and insurance companies were as well.
Compounding matters is that risk was not appropriately priced--so the exploding of risk premiums was magnified through the leverage. To add insult to injury, those who thought they had protection (via CDS)really only had a worthless policy that could not be backed up by the issuer.
There was much information out there regarding leverage. Had the risks been priced appropriately to begin with, the leverage would not have been so much the issue. And there were many sounding the alarm that the risk spreads were inadequate. Further, with the mortgage guarantors, the Fitch reports clearly showed a shifting of the loss curve to the left (sooner) and it was steeper (more dollars). I found NO media agency that reported on this shifting curve.
The information was there....it just was not reported upon. I posted these reports in this space last year (Spring 2007).
Roger,
Goggle an pdf by Mebane Fabor entiteled "Quantitative Approach to Tactical Allocation". It uses a diversified grouping using a 10 month sma.
Ken,
Tucson
Roger, A recent study shows the 200 ma stopped working in the 90's when everyone started paying attention to it. ( not sure which study , maybe Market Science blog or CXOAG). Buy and hold worked just as well. Surely as a money manager you must have extensively backtested the 200 ma strategy. If not, why not? Do you just invest on hearsay?
How about Buy Low Sell High? You just have to know what is low and what is high, which you can only tell after it's happened.
5:24 annon ..I also recall reading that 200 dma has become less effective as a tool. Roger, can you point us to research/info that support your belief?
To Black Libertarian: I use a paid service called tradestops.com which tracks the prices and compares it to 200 day moving average. But it does only once a day at the end of the day.
Regards.
Your idea sounds a lot like Faber's except with different and more asset classes.
My strategy 3 is another variation of the concept: Twelve asset classes (below). Keep equal long positions of each asset class above it's 200 day moving average. Btw, I treat Money Markets as always above it's 200 dma.
This system has been 50/50 cash/U.S. Long Bonds for many weeks now.
Agriculture
EAFE
Emerging Markets
Energy
Industrial Materials
Internatiional Real Estate
Precious Metals
U.S. Large Cap
U.S. Long Bonds
U.S. REITs
U.S. Small Caps
Money Markets
Tomk, Makes no sense. 12 asset classes is 8% @ each. That gives you 8% bonds and 92% cash roughly. What are we missing here?
So President Elect Obama says "It's going to get worse before it gets better". That's the headline on the paper, radio, TV,Drudge,etc.
Contrarian Indicator? What say you?
TomK is saying that if only 2 asset classes are above the 200 dma, then the portfolio is split in to 2 parts - 50/50
@jello - bingo!
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