We are back in the red again for the year. I am not crystal clear on what the tone of sentiment is from various punditry and other sentiment gages so my focus continues to be on what I think the markets are saying.The most jarring thing, in addition to all the other things I cited last week, from the last day or so has been the plummeting of 10 year treasury yields.
Here and there I see arguments made in favor of this not being the start of a bear market. They could, of course, turn out to be correct but for now my plan is to stick with my defensive leaning in portfolios.
If this is the start of a bear market it does seem to be pretty textbook. There is concern but not panic, I think of the action as being a rolling over and the worst hit area is the one that had the most excess. One strategic item I would say to focus on, if you are one to take any defensive action at all, going down by a smaller amount than the market not your absolute result. Anyone lucky enough to to neutralize a significant amount of a bear market drop will add a lot of basis points to their average annual return over the long term.
That is a difficult concept to grab onto as it is human nature to focus on the here and now but think about it logically for a moment. How important is a 20% decline for money that you need in ten or 20 years especially if at the same time the market drops 25% or 30%? It shouldn't be important.
Before I move on let me be clear about one thing. All the things I write about in this regard are about the attempt to neutralize declines. There can never be any certainty with these strategies.
An interesting comment came in yesterday that I think fits in contextually.
A reader asked about how to boost return up to 12-15% without taking too much risk. I would say that the next time the S&P 500 goes up 25% in a year go 100% utilities--that should get you 12-15% without too much risk.
Apologies for being a smart alec, I couldn't resist. One thing that you can't lose sight of is that in general terms you can only take what the market is giving. This means that in a year that the market is flat you will not be up 15% unless you take a lot of risk or are very lucky. Don't discount being lucky once or twice in your investment lifetime but don't ever plan on it either.
If the assumption is that the market will return 7-10% then I don't know of a way to get 12-15% with low risk.
I've had a couple of posts lately about absolute returns, which in a way is a part of the question. At times it makes sense to go a little heavier with absolute strategies and at other times not. If there was a reliable way to average 12-15% without a lot of risk someone would have figured it out by now.
18 comments:
Roger, to answer your first question I looked at Jason Goefert's Advisor-Investor sentiment model. It's a composite of several popular surveys: Investor's Intelligence, AAII, Market Vane and Consensus.
As of last week (he only updates this model once a week) this model was at it's most pessimistic level since the summer of 2006. From the year 2000 there are only 2 other instances where this model dipped lower, in early 2001 and at the market bottom in 2002.
What does it mean? Well, I wouldn't be surprised to see the market recover a bit from here, at least temporarily. I think yesterday was a short term selling climax.
Roger,
You are not looking at this from the readers perspective.
When the market goes down you are an idiot. You only make sense when the market goes up :)
This is a great point and one I've been stressing myself.
If this is the start of a bear market it does seem to be pretty textbook. There is concern but not panic
August 16th was a great buying opportunity because it was easy to feel the panic. These -200 days almost feel normal these days. We need another Cramer screaming tirade directed at the fed or program traders or the short sellers or something else irrational. Then I'll be on another buying spree.
Another way to look at 12-15% a year return is to look at the risk/return characteristics of each investments in the portfolio. The problem is the lack of reliable info on the risk. I have used peak-to-trough, as well as the standard measures(standard deviation, beta, sharpe ratio). While an investment dropped an average of 2% vs 8% drop for the S&P 500 could be safer than the S&P 500, but probably not by a factor of 4. Appreciate any quantiative discussions on the risk assessment.
My sense of the sentiment is much like what Bill B said. In August, the panic was palpable, while now it's a much more understandable corrective phase. In August, there were probably real buying opportunities for a bull, while this time around it seems like the best anyone can do is defend. I suspect this is the difference between a liquidity-induced financial panic and a real economic recession.
jag,
I can not recall the source, but your distinction seems well chosen. "Solvency" vs "liquidity was juxtaposed elsewhere and the former is now on its way to being perceived as the primary issue. Could have been a john mauldin newsletter.
The market does not have a peg to hang hat and build a floor, imho. No one is really buying the decoupling or the bail out spin. Those have worn off. So what else can be the perception that breathes air into the rallies? Peace in the mideast? naah no explanation needed.Cheaper oil? naah, seen as a recession on the way. Something may be lurking out there or we just have to wait until the elections are over. Not only is there uncertainty about the croweded field but there could be a third election without a plurality by the so called winner.
I think it's wise to have lots of cash now, but only if one has a plan of re-entry that's not far off the next new low. A good set of long term charts with trend lines may be all one needs. Far from being a TA expert I have heard TA types become despondent over their indicators and revert to the simplicity of trend lines.
Anon 7:35.
I believe that the reason that there's no reliable info on the risk is that hot sectors tend to rotate based on the business cycle IMHO.
You can back test stocks using the standard measures, but who is to say what the next hot sector(s) and dog sector(s) are going to be? For example, weren't the financials with their decent dividends once considered to be 'safe' stocks? This years hot stocks could be next years portfolio killers.
You answered your own question when you wrote "The problem is the lack of reliable info on the risk."
That's why so many savvy financial experts say that the only free lunch is diversification. To do otherwise in chasing alpha is a risky exercise in futility over the long term.
But as Roger pointed out, some get lucky at this some years. But it's not a good permanent strategy in mapping out a portfolio IMO.
In conclusion I would say that diversification may be your only friend when assessing risk.
However you can seek some alpha in being overweight in good sectors and underweight in bad sectors when they are in their current runs. For instance in early '07 being overweight energy and underweight financials.
I also like the idea of buying the best of last years dogs such as financials and homebuilders that pay good dividends, and waiting them out. I will be a buyer of these, financials first, early next year.
JackS
If you can get a source of leverage that is a lot cheaper than the return on the S&P you can lever up and assuming that in the long-term stocks return something similar that they have in the past your risk isn't too high. But the interest rate on most retail margin loans is too high. So leveraged funds, futures, options etc. would be the way to get it, though Interactive Brokers gives fairly low borrowing rates to smaller investors. Now if you can add a little alpha and little more true diversification into that mix you can beat the market without tremendously increased risk.
Roger,
while do you bench mark the S&P 500 as opposed to the Wilshire 5000?
For those young folks out there thinking long term and could not care less about the recent volatility, here is an excellent article titled:
Is the Cap-Weighted Total Stock Market Portfolio Super Efficient?
http://tinyurl.com/yv2r44
(I'm 58 so I'm chewing my nails ;) )
JackS
I suppose we could switch. As I look at a chart that compares SPY and TMW the difference is imperceptible for YTD, 1 year, 2 year and 5 year time periods.
This suprises me as TMW should skew a little smaller. I would have thought TMW would have lead in almost every year but 2007 but they are neck and neck as mentioned unless I am missing something.
If I am seeing it correctly I'm not sure a switch would matter. Even the sector make up is almost identical.
If I am missing something please let me know.
O.K., so someone has come up with a way to get over 15%:
http://tinyurl.com/2cxuyo
I heard that next year they decided to short the heckler's portfolio. But that's just a rumor.
JackS
i think they bought the ultra short subprime etf
Didn't Morgan Stanley short subprime this summer and end up with a $2.5 billion loss? Just proves if you try hard enough you can lose money in any market ;)
Better link
Just in case anyone wanted to watch the cowbell video...
http://tinyurl.com/ff7qr
always worth the time.
Having dividend paying stocks in a portfolio - foreign and domestic - will help total returns through a correction. My concern is that we are seeing a confluence of big problems attacking the economy at the same time. I am 100% invested, but have adjusted my portfolios to reflect my view.
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