We had some interesting comments come in on the last couple of posts that are worth mentioning."I am losing my shirt in this market, down over 3% on the year and not happy. I was up 12% just a few months ago."
One or two other people jumped on this guy saying he isn't diversified and the like. There is nothing wrong with big bets, un-diversified portfolios and risk taking, it may not be right for a lot of people (me included) but it is right for some people. The thing is not that you shouldn't invest they way we assume this one reader is but understanding that big swings will accompany this approach.
Whatever it was that put this guy up 12% and then took him down 15% from his high will take him back up ahead of the market at some point. Does anyone doubt this? Big swings go hand in hand with big risks. Even if you aren't that experienced I would think this would be common knowledge.
Where I think this person runs into trouble is with the emotion I think he is expressing. Whether he intends it or not, and I think he does, he is living by the sword. You know how the rest goes.
"Screw being well diversified, I want my portfolio to go up and not sideways for ten years because I was too diversified. "
He goes on to stress the importance of beating the market and that diversification prevents that. Ok well I do believe in diversification. If you read the comment his is very preoccupied with beating the market but the what I infer is that he is very focused on the near term. What is more important, being ahead of the market YTD or beating it over some longer period of time that actually ties in with what you are saving for. Quick, did you beat the market or lag it in 1998 and how has that impacted your life since?
In expressing concern about his portfolio going sideways for ten years because of being diversified; well sideways for ten years happens every few decades, that's just how the market works but outside of those rare occasions, and they are rare, just being in is the most important thing.
After watching this week's video a reader left this, "Thanks Roger but I need some good stock picks to get my portfolio out of the red." Well aside from the fact that this site isn't really about stock tips I have talked about several things over the last year (repeated them too often, probably) that could have helped overall.
I have been writing about being underweight financials, shaving emerging markets periodically back to equal weight, generally increasing yield, reducing volatility, buying foreign currency ETFs, being underweight discretionary, being heavy in foreign stocks, adding in some double short fund and warning about the inverted yield curve.
I have been very transparent with all of these things and they have, combined with some luck, made the ride smoother at the time it has needed to be. This site chronicles my ideas about how to catch fish, if you take my meaning.
Further, if you are worried about being in the red then it makes sense to think about how to mitigate that before it happens and while it can happen at any time for any reason, late in the cycle with an inverted curve is probably a good time bring it down a tick, as I have been saying for I don't know how long now.
The picture is from Molokai.
25 comments:
Good post this morning, Roger. This comment is for Sharon Masker's comment/question from the Saturday post. Not an ETF, but American Century International Bond Mutual Fund (symbol BEGBX) may be of interest to you. From Yahoo! Finance, it is about 13% in US treasuries, with the remainder in foreign country and corporate bonds (more country than corporate). I suspect the American Century web site provides additional information on the fund. JCarr
Are you aware of free (or inexpensive) sites that will allow you to model portfolios for risk, return and composition?
Right now, I have a trading account that's only about 10% of my net worth. But I actively trade it. The research necessary to do this consumes a disproportionate amount of my free time and yet I'm not outperforming (nor underperfoming) the S&P.
I think I would do a lot better mentally if I just built a diversified portfolio out of index funds or ETFs.
What I find myself really like to see is something that would let me enter my symbols - say I want 40% S&P, 20% EAFE, 10% small cap, 20% total bond index and 10% cash - and show me the beta, Sharpe ratio, historical return, expenses, etc, for the entire portfolio.
Morningstar comes fairly close. It shows you industry/style composition and fees, but none of the Greek letters for the portfolio as a whole.
What I'd also like to see is a tool that will generate a correlation matrix of price data over a given time interval.
I want to be able to see for myself that two asset classes are really uncorrelated.
I can build all this stuff myself, I suppose. But now I'm looking at another week-long project to figure out an indexing strategy!
Why is it that everything you do as an adult seems to turn into a massive project?
Totally agreed, with big risk comes big reward/losses. I also perfer a more cautious approach. I call it the sleep factor. If I am up worrying about my trading positions at work or in my personel account there is something wrong.
anon 7:04--Take a look at ifa.com. They profile 20 or so index portfolios that you can easily emulate with funds or etf's. A similar site I find useful is FundAdvice.com. While the former advocates buy-and-hold, the latter incorporates several timing signals which help active traders like yourself smooth out the ride, to use Roger's phrase.
anon 7:04--Sorry, one more site to suggest is riskgrades.com. I've recently registered but not used it yet. Sounds like it might be just what you're looking for.
Why should designing an investment strategy be any easier than buying a house say?
I calculate this stuff for myself in Excel. It's not too hard. Yahoo provides all the data.
Risk is relative, and some folks who have lofty goals need to take bigger risks if they are ever to run with the big bulls. How else do you suggest that a poor sap with 10K, get to a million without it taking 30+ years of 401K's and Mutual Funds. Everything in life is a risk, and you need to decide how you will handle failure when and if it happens. Some of the richest people took huge risks, failed and started over again, just to make it even bigger.
If you are okay waiting 30 years to make your first million which will then be worth 250K, then go for it. I for one will be swinging at the fences and will die with my boots on. You may not agree with my style but thats okay because everyone should have their own style.
"anon 7:04--Take a look at ifa.com. They profile 20 or so index portfolios that you can easily emulate with funds or etf's. A similar site I find useful is FundAdvice.com. While the former advocates buy-and-hold, the latter incorporates several timing signals which help active traders like yourself smooth out the ride, to use Roger's phrase."
I do not like the timing at FundAdvice.com if you follow it for a while you will quickly see it does not beat buy and hold. Most frequent timing models do not work.
I do believe in timing the markets but I have only found it to be useful at major turning points. Once or twice a decade. Otherwise the zig zag usually defeats your model or intuition.
I did sell everything in early July as I see lots of problems with housing bubble finally popping, but I have yet to find a reliable and simple timing model to follow.
I find it hilarious that a few people were recently all excited about being up 10%+ for the year. If you look at the return adjusted for inflation you are actually under performing big time. Losing money since 2000.
Interesting article in the NYT yesterday. The author explores the dividend-reinvested S&P 500 decade return (2000 on) vs inflation of the dollar and a number of commodities.
S&P 500 Return measured in:
Dollars, inflation-adjusted -8.1%
Wheat -63%
Oil -61%
Gold -50%
Housing -22%
Don't get excited in this US market until you are able to return 25% plus annually for many years to come.
"Dollars, inflation-adjusted -8.1%
Wheat -63%
Oil -61%
Gold -50%
Housing -22%"
The sky is falling
The sky is falling
If I told you I remember gold around $800 and silver around $50 would you make the argument that we have had deflation over the last few decades?
Or would you realize you can always sight a few items to make a point that is patently false?
My numbers are dated but I remember reading the cost of the soda in a can of coke was $0.015 and the cost of the aluminum can was $0.03
Now I forget if a can of coke was $0.75 at the 7-11 near by or actually higher or lower. But simply citing commodity prices can be very misleading when evaluating inflation at the consumer level.
The government numbers are not perfect for inflation or anything else. But they are not that bad either.
Do not be fooled by the scare mongers out there.
Joellyn and I were staining our deck all morning so i might not be on my game right now but anon 9:46, you have cherry picked one of the three or four starting points in the last 100 years that makes your point numerically correct. Start in November 2002 or March 2003 and the market is way ahead of inflation. Over the last 12 months it is way ahead of inflation--unless you are just parroting Peter Schiff and are going to tell us that versus a dozen eggs....
to clarify; cherry picked one of the starting points where, for several years the market's round trip was break even and lagging inflation.
My feeling on swinging for the fences is, if I'm going to trade my own account, 60% winners vs. 40% losers would make you a very, very good stock picker.
If you make 25% on average on your winners and limit losses on your losers to 5%, you would average 13% a year, which would be an excellent long-term return.
If you let losers run 10%, you would average 11% return, which would trail the S&P and Dow for the last 1, 3 and 5 years.
Also, how many people who trade their accounts are "all-in" at any one time?
It seems to me that if you swing for the fences, you are counting on maybe half and half winners and losers PLUS your own ability to identify that one once-in-a-lifetime winner.
My "problem" is very different - I already have that first $2m, still with 15 years to go until retirement, and the balance between growth and defense is driving me batty.
Anon 12:17...Sorry to hear that you only have 2m...what a huge problem...my violin is playing in the background.
Even with a money market rate you'll have 5m in 15 years....boo hoo....I ever are you going to live on that kind of money.
"I already have that first $2m, still with 15 years to go until retirement, and the balance between growth and defense is driving me batty."
congratulations on your success so far. Withdrawing 4% from $2m would be $80k a year. Not fantastic, but certainly liveable although I do not understand the previous heckle for $80k in retirement.
If I were you I would go conservative until the next bear market is complete whenever that is and then get more aggresive.
anon 12:17,
Only $2m and 15 years until retirement. You are a greedy fool. Be happy to have money and stop showing off.
I hope the stock market crashes so people like him feel the most pain. What a jerk. Typical American, complaining about $2 mln in savings. Always wanting more.
For Sharon.
I forgot to give you this site yesterday:
http://tinyurl.com/26p4gp
Be sure and screen out the mortgage REIT's in tour research.
And here's a site for checking current dividends:
http://www.dividenddiscountmodel.com/
For Anon 7:04,
Here is a site with some model portfolios:
http://tinyurl.com/ywqbrd
Wanting to have more than what you have today is indigenous to America? Wow, I guess I'll never leave. Settling for what I have now is no way to live. That's the most ridiculous statement I've heard yet. Why does it matter if he has 2 mil or $2,000?
Thanks to the person that posted the fundadvice recommendation. I'm very intrigued with their ultimate buy and hold allocation, although I wonder why the bond allocation is so high (I'll keep reading to see if I can find out).
There is so much emotion right now. Too much for comfort.
Wanting to have more is not "indigenous to America", but is innate to the human race. Humans by nature are greedy bastards. If you think its only Americans than you've got a big issue in your head. Go talk 1 Billion Chinese that have withdrawn money from houses and put it all on the market....I guess thats not greed.
The poster that said 2m = 80k a year, well how about that 2m growing to 5-10m in 15 years? 2m is still a lot of money for almost everybody on earth.
If I ever met that guy with $2,000,000 and he started complaining I would knock his teeth out. This kind of person deserves it.
Anyone not grateful about that much money needs to go to a third world country and live for a few months. This is the very reason everyone hates us Americans.
This, from Bloomberg. It doesn't look good for Monday. John
Yen Gains as Stocks Tumble on First U.S. Job Losses in 4 Years
By David McIntyre
Sept. 10 (Bloomberg) -- The yen gained against the dollar and euro as investors sold riskier assets such as carry trades after stocks tumbled late last week after a report showed the U.S. economy lost jobs for the first time in four years.
Japan's currency rose to 112.87 per dollar at 6:48 a.m. in Tokyo from 113.38 late in New York Sept. 7. The yen advanced to 155.56 per euro from 156.10 late last week.
Anonymous 7:04,
I feel your pain. I don't understand why online brokers can't provide a feature like this.
Sure this can be done in Excel but I think it gets a lot more complicated if you're doing anything more than a buy and hold portfolio. I wish I had a tool that could provide not only current Sharpe Ratio, Std dev, composition, etc., but could calculated them over any chosen timeframe.
I want this market to tank so all the rich people on this board lose their shirt.
BobGreenig
net worth: 29k
Ain't happening. We're all in cash. LOL
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