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14 comments:
Speaking of defensive portfolio, would the simplest way to do is by netralizing the market sensitive postions with equal but opposite positions. If I want to reduce my market exposure from 60% equity to 40% equity, I can either sell 20% of my equity or buying 10% 2x negative funds or 20% 1X negative funds.
There is another way to do it, selling short positions(and being paid with margin interest at the same time). For people we like options, selling long dated OTM puts also offers a coushing and is probably is cheaper than buying puts.
On qualified vs. nonqualified. I owned several etf/cef's last year. The dividend payouts for the vast majority were qualified dividends. Only two of the several funds I held paid out some nonqualified divs. Those two were iwm and lor.
Roger, Glad that you found the article as interesting as I did. Can we dig a bit further, as I look to you as the better communicator for the diy'er. John's earlier defenensive portfolio is indeed simple enouggh. Can you comment on his Portfolio A. It perplexes me. Big bet on the dollar lower and long on energy? Can you comment on his references to long-short pairings? Not only does one have to know when to go defensive but the nuances of short term low correlations and poor co-variance. Wouldn't it be simpler to just use a short etf and forgo a pairing, or even better have an etf with a good track record of mechanically finding the right sectors to short (wish list with big assumptions). Finally, as a top down viewer I was drawn to his quote:"Active Indexer has attempted to demonstrate the importance of high- and low-quality security cycles. In security selection and portfolio construction, high-quality and low-quality are more important than size and style factors because they are a better embodiment of economic fundamentals." Can you operationalize high and low quality? A simple searcher who gets frustrated with good sounding stuff that just seems not quite accessible.
roger, take a look at bill cara, he too is lost in space. Quite cool that both of you are using the same metaphor. Signal of a linkage on its way to critical mass, a psyhchological angle of repose, a tipping point.????
This is similar to what I do when I lower my beta. I use DVY for most, some cash, and then it depends on where the money is going for some short-term action. Good stuff, Roger.
Oh, I think why it is viewed as "defensive" is that DVY's beta is below 1. (1 being the SP500). So DVY should move down less in a correction.
Should...
Models this week:
Timing Model = 1.0
70% long, 30% cash
Allocation of long positions:
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
U.S. Sector Ranks
Mid Cap Value 5.0
U.S. Real Estate 4.5
U.S. Telecommunications 4.0
U.S. Basic Materials 3.5
Precious Metals 3.0
U.S. Financials 2.5
U.S. Oil & Gas 2.5
U.S. Banks 2.5
U.S. Utilities 2.5
Intl Ranks
MSCI Singapore Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI Malaysia Index Fund 3
MSCI Hong Kong Index Fund 3
MSCI Mexico Index Fund 3
MSCI Germany Index Fund 3
S&P Latin America 40 Index Fund 2
MSCI Sweden Index Fund 2
MSCI Spain Index Fund 2
MSCI Brazil Index Fund 2
MSCI Emerging Markets Index Fund 2
S&P/TOPIX 150 Index Fund 2
MSCI Japan Index Fund 2
Region, Asset Class, Style ranks
MSCI Pacific Free ex-Japan Index 4.0
Dow Jones Wilshire REIT index 3.0
FTSE/Xinhua China 25 Index 3.0
Silver 3.0
S&P Latin America 40 Index 3.0
MSCI Hong Kong Index 2.0
MSCI Emerging Markets Index 2.0
MSCI European Monetary Union Index 2.0
Percent Qualified Dividends/ Total Dividends (excludes cap gain distrbs)
IWN 69 %
IWB 100
EWM -0-
DVY 100
OIH 88
Thanks for the comment on new $ Index
Powershare funds.
Jay Charles
Really enjoyed your commentary today.
There are two ways one can look at a defensive portfolio. Is it a portfolio that will react reasonably well in a bear market, or is it a portfolio that will react reasonably well regardless of whether the market is in a manageable bullish or bearish scenario?
Years ago, I determined to make sense of a variety of investents and portfolio accounts (taxable, deferred, hard asset, and tax free) by using a Permanent Portfolio for those investments that together would be expected to perform well in tandem for a variety of economic climates and a Speculative Portfolio for those investments that I thought had excellent prospects for more immediate and intense profit.
Since the late 1970s, this approach has worked quite well for me. Knowing that a Goldilocks economy would make an average portfolio look good and that a nuclear war or some plague would render useless the best-laid defensive investments saves me time and worry about extreme scenario guessing.
I have added ProShares' QID to my watch list for inclusion in the Speculative Portfolio recently.
There are likely seasoned investors out there who remember the defensive portfolio of a few decades ago: 25% long Treasury Bonds, 25% gold, 25% Swiss Francs and 25% silver coins. That was after one had previously purchased dried foods, bottled water, a shotgun with ammo and a tankful of gas to head for the hills to outlast the riots in the streets. Ah, the good old days.....
Yep, good old days indeed: That was Harry Browne's 'permanent portfolio' model and I allocated a portion of my assets to it for some time (along with extra 12-gauge ammo) until I realized it didn't sufficiently reflect the way the real world worked -- not that it missed by much mind you and not that I have completely abandoned it either -- I may think that much of the libertarian world view is rather juvenile but when contrasted with the world view of those who would entrust their wealth entirely to the financial services industry or even (gasp) believe that elected politicians really had their best interests at heart ...well, maybe it doesn't come out looking all that bad after all.
http://stockcharts.com/charts/performance/perf.html?csrsx,tarex,hdogx,tfsmx,merfx,oakbx,spy
Go to the above graph to see the components of a portfolio that is composed of selections which have less peak to trough( as a guage for drawdown)than S&P 500 for the past year. Wht if the trend persists into the next year?
T & RW, interesting comments. I of course live where quite a few folks are bomb shelter/off the grid types. While I don't know about the Swiss francs a lot of people up here do have gold and silver. Do I need to say anything about shot guns, this is rural Arizona after all!
I live where I do for the serenity not to avoid "riots" or whatver;-)
The PDF copy of Harry Browne's portfolio that I have lists 25% gold, 25% bonds (he suggested 30-year), 25% broad U.S. stock market index fund, and 25% cash, with an annual rebalancing to 25% each. It was downloaded about 3-4 years ago.
Harry Browne died last year (Lou Gehrig's disease) and his 'permanent portfolio' model did not exactly work as planned -- but frankly that could be said of just about every portfolio model I've ever seen or heard of -- but to h*ll with that. His legacy (for this particular reader at least) was to never forget that: (1) the world is essentially unfree, you must protect yourself but never at the cost of becoming inhuman; (2) that means you also must protect capital because things can become worse than you ever dreamed and they can do so more quickly than you ever imagined possible; (3) don't be afraid to go to extremes ...provided those extremes are offset by countervailing extremes; and (4) if there were a sure-fire road to riches then those who claimed to be 'in the know' wouldn't waste their time writing newsletters, they'd be showing you real results, so the opinion of "guru's" must always be taken with a grain of salt.
I never thought 'ol Harry was god ...but I did think he was worth listening to. Funny, I think that of more people more these days; must be getting old. Ah well, forget that maudlin cr*p: Harry Browne, R.I.P. N'uff said.
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