you had spoken extensively about criteria to reduce equity holdings in a portfolio.
Is it time to increase equity esposure? what is your criteria? Do we end up buying back in at higher levels?
Tough question. The simple answer is buy when the market goes back above its 200 DMA but I have not done that this go around and I have lagged this move up from 1220. Lagged not missed. It seems like this person has been a reader for a while (thank you). For most clients I am about 75% invested and have not gone back in.
For now that looks wrong. The question is does that stay wrong? The yield curve inversion has been getting deeper and the rally has come on little volume, deteriorating internals (per Michael Kahn) for most of the move and has done exactly what a lot of people have said which is the market will rally but make a lower high. So far that is not wrong.
I should have been more invested but I did not get more aggressive. I have written a lot about not having too much cash raised and while some days it does feel like I have too much cash the things going on right now almost always lead to a bad market. Could this time be different? Of course, this is why I have much more than a toe in the water.
This is a situation where I know how the markets have reacted in the past, am only partially defensive which means the consequence for being wrong will not be bad.
Also keep in mind, that if you have read this site for any length of time you know I am not focused on trying to be right this week. Lastly I would add that like with any call this will be right or wrong. Being wrong absolutely goes with the territory. I think being a good manager includes not having the portfolio's success too levered to the manager being exactly right every single time.
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15 comments:
It's natural enough to fret when the market is trending upward and a previously determined defensive position doesn't seem right but, regardless of time-frame, one must always consider the alternative. The question is, if I'm earning 5% on virtually risk-free cash -- 0 SD (standard deviation) -- what return should I require to take on additional market risk and what asset mix can I use to gain that return without losing more than I could bear to lose?
As of yesterday the S&P500 had delivered a YTD return of ~5.8% with a SD of ~19. How much of that is worth biting off on the chance it will go higher vs. the chance it will tank?
That will vary by investor but in a rather weakly trending market such as this one, with poor internals and barely able to keep its head above it's 200 DMA, the answer probably requires more return than the broad market indexes are providing which means either adding sector bets, using leverage, or both. That's a lot of risk for a dubious reward.
It feels very different when being wrong means losing 20% of portfolio value as opposed to being wrong meaning a gain of 5% when a gain of 7% (or whatever) was, in principal, possible. The latter is an irritation, the former starts with cold sweats but doesn't end there because now you know you've got to gain 25% back just to break even; been there, done that, got the T-shirt.
Yes, yes, the old sky will fall argument.
Isn't there always reasons to fear the market? I will agree housing does not make me feel wonderful.
But Bearish sentiment is high and the market seems fairly valued (could go either way).
I really think the current risks are to the upside.
200 DMA rules seem a poor choice to me (whipsaw). Roger endorses the 200 DMA and then chooses to ignore it for repurchasing because of personal concerns.
Actually, I am glad to hear there is so much fear. Put on your T-shirt, hold your cash, and watch the market go higher.
wow, scathing:-)
I am 75%-80% invested you know.
RW, the standard deviation this year has been 19 is higher than normal and comes as a surprise given the rangebound trade
Anon, sold to you; good luck and bon voyage.
Roger, the SD of 19+ for the S&P500 was historical (multiple years, should have made that clear). I remain net long also but, as before, strongly hedged with more cash than usual. Just added a bit more zero-coupon T-bond exposure to offset my commodity exposure but otherwise standing pat.
Yes I know roger is still heavily invested. But with all due respect to all prognostigations by everyone (including me) on Rogers blog how many of us are currently beating a buy and hold strategy for this year?
I know the fear and negativity is in vogue, but that does not mean the market has to go down.
As for when to sell, I think people should question many mechanical buy/sell strategies. I do not think the 200 dma strategy is very good, yet I do not see it questioned a lot.
When will I sell? I'm still waiting for the market to peak. I wish I could tell you when that will happen.
My client's remain ahead for the year relative to their market-based benchmarks though that's due to a good lead into May which has since dwindled.
It's been an extremely difficult market environment, but I don't like the way this end of summer market is playing out...no leadership to speak of, sectors rallying based on little in the way of fundamentals (eg. housing and technology this week so far), no confirmation from transports, etc.
I've been about 25% in cash as well and while watching has been frustrating, I'll refrain from buying for now.
FWIW, and that's perhaps nothing, I see no fundamental value in the names that have been propelling the market forward for the past month or so. None.
Good comments above. A lot of merit. I respect Roger's approach, but my temperament trumps my decision. 70% cash, and just went to 80%. Roger is motivated to not miss most of the next move up; I'm motivated to not miss most of the next move down...unless there is better balance between risk and reward. My decision making would be a lot easier if I just had a dependable risk/reward metric, instead of what is ultimately subjective interpretation.Best I can offer is that short term interest rate is seen by others smarter than me as a negative for equities, and there's a lot of overhead resistance to another move up, give or take a few percentages.
Soon I'm about to embark on using etfs as the sole vehicle. Sans Roger, sort of, isn't that the talk about index investing? Use etfs, the new way for the little guy. My core allocation will be derived by style box choices and similar broad indices, with much less non-core exposure to the narrow ones like industry sectors in order to improve total return ("active enchanced index investing" is the jargon used). I feel a little hesitant; it's the first time that I will be purchasing quite large amounts of a single equity/etf that will have low daily volme...except for the hotest etfs. Mutual funds allocations, in the past, were even larger but that was end of day prices. Advisor at Fidelity believes that etfs are primarily being used by day traders. Do it yourself portfolio construction remains largely tied to mutual funds. Assuming the observation by the fidelity advisor is accurate,as plans creep closer to reality, I'm disappointed and concerned that etfs are not being used as expected. Perhaps, my realization is similar to why the finacial journalists are associating etfs with speculation. All these new etf websites and they are geared to day traders. Errr. Maybe, it's true????? How much in the minority am I?
daytraders use ETF so they can mangage risk versus trading single stock.
Anon, let's set aside the question of what the opinion of the Fidelity Advisor would likely be if Fidelity was in the ETF business rather than the mutual fund business, and simply ask if there is really a problem with ETF's being used by "day traders." Technically, since active trading volume (and arbitrage) normally improve pricing, it seems unlikely there would be a problem except possibly in the case of those more thinly traded ETF's you mention in which case the relative dearth of trading volume could cause wider spreads.
That said, if I understand you correctly, it sounds as if you are planning a 100% move to ETF's; is there is some model you have decided to follow that requires that? Even so, what is the rationale for making the move all at once?
I made that move into etf's last fall. Not exclusively. I will still buy a bond fund or two. I have gone after a few stocks that got pummelled down into the bottom feeder range. The end result has been that 'my' results have been less volatile. Using commodities to offset equities and having short etf's to hedge long positions has been very good for me while the current volatility jumps from sector to sector. I too got the t-shirt handed to me back in 2000-1. This feels much better. Patience and conviction are two words I have started to gain an appreciation for. Waiting out this fluff in the market isn't easy. IMO the next couple of weeks will tell the tale of where we are headed and how fast we get there... Tom in Indy
tom, not sure whether the next two weeks will be the tell or not but if all ETF ( or close to it) means less worry I am all for it. To RW's point, and I say this genrically, hopefully you have a plan or method that makes sense and properly geared to what you need.
I think that all the above comments to the original post reflect the obvious. It takes divergent views to make a market. I believe that having a permanent portfolio in some hard assets and dividend paying timely stocks and inflation protected bonds is smart. Having cash is not. In your speculative portfolio, if one is reluctant to research individual issues or have a sound rationale for investing in a sector, foreign currency or region, 26 week t-bills or, say, a GE Interest Plus account makes sense.
Does anyone think that, being in the initial stages of World War 3,
worrying about ETF advice from Fidelity Advisor is worth the paper it's printed on?
rw re: your points. Yep, exactly fidelity advisor's point. He said that day traders are using etfs to lower volatility. Which is fine. My concern is as you suggest. Too many etfs, even the broad index ones, with too little volume. It's the volatile high beta ones with high volume, used by traders. The passive index investor is not going to generate volume, but I would hope that the active index investor would have more of a prescence. Rationale for my move to all etfs: leave behind the employer 401k narrow choice of mutual funds, have more flexbility without the restrictions of mutual funds, have less volatility than stocks, and not depend upon choosing mutual fund mgrs to beat the average which only 1 in 4 do. YTD, the broad index of value style would have beaten every mutual fund available to me in the current Plan. I vacillate in deciding how to make the transition. 20-30 % will stay with the employer plan, for sure, in cash. All the balance or portions may move over time. If you see pitfalls ahead, please feel free to mention. SD of 19, fwiw, is the top of the historical range..saw it on an etf web site but SD, elsewehre, for spy is listed as about 7 for the past year at m.star.
I just do not see the market overvalued here (I do not see it undervalued either)
I see no reason why the market could not go up (or down) 20% from here. Forget std dev. If you want the upside you will have to risk the down side.
People are scared of the 2000 market peak when pe ratios were sky high. That is not the case today, but there is still plenty of bearishness out there (even if they were bullish when pe's were sky high)
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