Last week we had a pretty big snow storm (the picture is from a storm from a couple of years ago taken from inside our dog pen with the woodshed on the right). Yesterday we took the dogs on a pretty lengthy hike but there was still a lot of snow on the ground which made hiking much more difficult than normal (kind of like walking on the beach for five miles).While this makes for a great workout it makes for a poor investment process--the making things more difficult than they need to be which has been a recurring theme here for the last couple of days.
I wrote an article for TSCM four months ago that explored each of the ten S&P 500 sectors and whether to overweight or underweight them in a bear market. In looking at what I said about each of the ten it looks like I went 9 1/2 for 10 for the four month period which is nice but there was practically no analysis in the article. As I try to stress all the time just knowing how the market usually works when it is slowing down and then when it starts back up can make the job much easier and easier is better.
Unfortunately the people that just use broader products like the market cap, style or total market funds have no way to access these rules of thumb. Despite what some MSM sites would have you believe sector funds are not tools of destruction.
A portfolio that is 50% in SPY and 50% in EFA (this is overly simplified of course) would have 22% in financials (SPY is 17% and EFA is 28%, divide each by two and add them together). So putting 22% into a financial sector fund would be the exact same exposure. From there the idea of going 17% financials or 27%, based on the stock market cycle, is also not an insane speculation. A specific overweight or underweight may or may not end up working out of course but a moderate approach to this can be quite prudent.
The person who would weight 40% to a sector that has a 12% weight in the benchmark would no doubt make this type of mistake with proportion with other products. For every approach there is reckless and there is prudent. I am convinced that prudent use of sector weightings can smooth the ride out considerably and the myriad of different sector products even offer that chance for adding more value than just sector alone--assuming picking stocks is not ideal.
18 comments:
Roger,
Where do you see the Dow ending the year and what areas do you see doing well this year?? Any ETF's you love for 2008??
Thanks!!
I don't follow the Dow 30 and Any ETF's you love for 2008 is not what this site is about.
Hey Roger,
Greetings from Belgium! Came to your blog via an article of yours about the gold and silver ETF's from a year ago on 'seeking alpha'. The difference between the DB powershares(DGL,DBS) and ishares(IAU and SLV). You should look at the graphs over a one year period. It looks as if DB has made a very bad bet half december. Or did they take out a huge fee?
Interesting, not?
There's a very interesting post on Seeking Alpha today about GAF, an ETF for Emerging Markets in the Middle East and Africa. The author makes a persuasive case, especially in relation to gold and interest rates. Maybe you've looked at this in the past and, if so, apologies for asking, but I'd be interested in your opinion. These aren't exactly frontier markets, but the idea of investing in the Middle East and Africa is out there (at least for me.)
Thanks very much.
the DB funds go ex and pay a dividend in December. The chart you are looking at must be distorted to not account for the distribution.
GAF is a lot of South Africa, then Israel with a sprinkling of others. I would be surprised if it could be a proxy for anything other than SA and Israel.
Thanks for the ex-dividend answer. Didn't come to my mind because precious metals, but as your article stated it's mostly treasuries...
(I use the Yahoo Finance graphs)
Roger,
Ok, what do you like for 2008??
Tim Middleton mentioned GAF last week as a way to "invest where the oil is."; it's an interesting idea, but not one that I think I'd be interested enough in to even spend time evaluating.
i own GAF. Its largest holding is the Arab Bank, which is based in Jordan, pays dividend and one of the largest financial institutions outside the G8. Also thanks to the Bush administration harassing them after 9/11 they do not do business in the USA any more and are not exposed to the subprime mess.
I also own ISL and i can tell from following them that GAF does not act as a proxy for Israel even though Teva is a top ten holding for GAF.
If anything my ISL has exploded to the upside recently while GAF has been going sideways.
Holding an Jordanian Bank may be profitable. So was holding Deutsche Bank of Germany in the late 1930s. Krupp was a good hold, too. As well as Siemens.
Follow the drift?
Anon 10:39
Roger likes whatever goes up and hates whatever goes down, just like everyone else here (unless he's shorting of course). He does not give specific stock or ETF picks.
i lived in Jordan half my life, if i were to bet, and i am not a betting man, i would put my money on the Arab Bank outlasting Citibank.
Well, Ag and commodities had a good day, hope the
trend is our friend. MOO!
As far as frontier market diversification,
TRowe has TRAMX which is a new Africa/Mideast
fund that is up 20% in three months, and 4 ytd.
Worth looking at.
And, Roger, isn't comparing the financials in
EFA to the financials in SPY apples and oranges?
For example, the performance of foreign financials compared to US financials....is there that
high of a correlation between the two? Just a question. Thanks,
Scoot
I'm not sure I am comparing them so much as talking about one way to determine what equal weight is.
HBC, the largest financial in EFA, as a 0.747 correlation to XLF. DRF has a 0.762 to XLF.
So fairly high but not that high but many foreign banks are down similar amounts as US banks.
anonymous@2:18 - no, I don't the drift. Care to spell it out? Because any comparison you're trying to make here seems rather nonsensical.
The drift is investing with ethics or investing by holding your nose, closing your ears and shutting your eyes.
Hamas/Hitler/Baathist/National Socialist/suicide bombers in markets/gas chambers/genocide/ madness/overt support of banks to terrorist groups/ money laundering/ refusal to let Jews bank and transact other business, etc.
There appears to be logic here.
But, to each his own.
yep, i invest by holding my nose, shutting my eyes and closing my ears.
That's why i never let the cluster bombs dropped by Israel on civilians nor the crushing of preteen Palestinian skulls by Israeli tanks stop me from investing in Israeli companies nor having great Jewish friends and business partners.
It is all relative my friend and can be spun a million ways.
I believe the only solution to that problem is economic prosperity and freedom for everybody involved. It is a lot easier to be radical when you are poor and hungry than it is when you are well educated and well fed.
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