Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
34 comments:
2-3% for each holding certainly would limit risk, but that would mean 33-50 holdings for an investor. Any suggestions for the small-timer who would like to limit holdings to no more than 20 ? Perhaps stick to no more than 2-3% with 20 holdings (40-60%) and put the remainder in cash ? How would this 2-3% guideline translate to diversified OEF's ?
The follow-on to your point should be that people who make big bets should take some simple precautions ala the 200 dma. That won't protect you from scandals ala Madoff, of course.
O/T on Occam's Heater--I replaced the thermocouple on my gas fireplace Christmas Eve. It was actually pretty simple with some helpful advice from the technician at the fireplace store :)
If you mean actively managed and diversified OEF, I've got nothing for you there.
But in the video I mentioned 2-3% for narrow and narrow-ish themes.
An investor not having the time to build domestic equities with individual stocks or sector funds could probably use broader ETFs (broader meaning either cap size or style) and get it done with three ETFs. Those three could be close to half the portfolio. I think there are drawbacks galore to that but in the context of your question of no more than 20 holdings...
Occam's heater, nice.
Way to get it done yourself. You probably saved quite a bit of $$.
Another great article explaining why now is the time o get into equities...
http://www.indexuniverse.com./sections/research/5098-2009-outlook-a-winding-road-to-recovery.html
Hi Roger- a tad off topic here however I was struggling to locate some of your prior comments on this subject.
I am interested in learning more about your thoughts on using the 200 DMA as a tool for portfolio construction. One needs to simply remember that downside violations of 200 month moving averages are quite the rare beasts. The only times we’ve seen occurrences where this has happened have been accompanied by periods of very meaningful fundamental economic challenge.
In times of very choppy markets the 200 DMA can lead to a lot of false positive/negatives and thus cause an investor a lot of unnecessary trades and potential tax consequences.
Your thoughts on this would be appreciated. thanks
Anon 8:47
I have been looking at this same subject for awhile, doing nothing, but wondering if it could fit my situation, now that I am retired and cannot afford to wait 10-20 years for the market to recover. In the mean time I have seen my equity portfolio drop by 30-40%.
I suggest that you read "A Quantitative Approach to Tactical Asset Allocation" by MEBANE T. FABER. Also J. Segal in his book "Stocks for the Long Run" dedicates a chapter to this subject.
My conclusion from reading these articles plus others, is that you certainly reduce risk, i.e., standard deviation, but potentially at a price of reducing return. The 200 DMA system works great during times of sharp price decline (like now) but it is not that effective during times when prices zig zag on the way up, when the system forces you to exit the market at a price typically lower than the one you enter back. For this reason, if you are investing for the long run, depending on which period of time you pick (as J. Segal shows in his book), timing the market with this tool may do from about the same than buy and hold, to even hurt you.
In the paper by Mebane Faber, already referenced, the 200 moving average was tested on a monthly basis against the SP500, or a proxy for it going back 100 years. For good measure this was considered in sample, so it was then tested on 20 other markets, going back from 36 to 100 years. In all but 1 case risk was reduced and in most cases returns were higher.
I tested a number of moving averages with a diversified portfolio over the past 11 years. In ALL cases the moving averages beat buy and hold on a total and risk adjusted basis. This was a surprise, I really thought that there would be at least some moving averages that underperformed.
Such methods are not perfect, nothing is. From 2003 through 2007 buy and hold outperformed the best moving averages that I tested, but not by much. But during the bear markets it isn't close. Moving averages are just a tool that can be used to reduce risk, and it's almost certain that it will not be successful at this over all time frames ... but then I would say buy and hold is not successful over all time frames either.
Lots of impressive analyses to show that MA timing works - I've been aware of this for many years. It sure has been helpful for avoiding losses over the last year. One block that I can't overcome. If this strategy is to work, the practitioner has to have "faith" and stick to it through thick and thin. Sure enough, as soon as you start practicing this new investment religion there will be a merciless, long period of non-trending markets in which you get unendingly whipsawed. Ask yourself if you are prepared to "keep the faith" through that valley of death. For me, all these faith-based systems (including stay-the-course) are one of the best ways to lose your money or your sanity or both.
8:47, you had trouble finding? Really? Yes there will be fakeouts which is why i start small with defensive action (or offensive) instead of turning over the entire portfolio.
8:52, in all likelihood a major chunk of the losses get made up very soon. the notion of waiting ten to 20 years for markets to come back hasn't been correct very often.
8:56 makes a crucial point that I have tried to convey is that no strategy can be perfect for all times. what is your priority? pick what you think is best for your priority.
9:02 one way to help overcome the block might be to think of MA as telling you demand for stocks is either healthy or unhealthy. if demand is unhealthy you probably don't want to be fully invested.
Hello Roger,
I have been a 100% buy hold investor for quite some time and am contemplating a shift in strategy to one that adopts the 200 DMA. What would your advise be at the present time as my concern is that it is too late to be taking any defensive action now and perhaps am better off holding on now after suffering through such large losses. Please advise and keep up the great blog.
i've said quite a few times that down 40% is too late to take defensive action. if you need to sacrifice a name to feel better that plays into psychology but in terms of meaningful repositioning now i do think it is too late and I'm not sure what to tell you, sorry.
Hello Roger and thank you for your helpful insights. You commented that being down 40% is not the time to reposition. If one's Commercial REITS holdings are down 40%, there is no need to bail, they'll be back? No second shoe to drop in CRE?
that question was in the general context of defensive action for a portfolio not should a specific holding be sold which is an entirely different issue. Down 40% for an individual stock could be a great time to sell or not, depends on the stock.
Roger,
Can you please explain why indeed you utilize the 200 DMA in order to take some defensive action versus pure buy hold? Siegel has a very good analysis of the DJI from the 1920's to 2002 or so in his Stocks for the Long Run pp 289-297. He compares MT using a 200 DMA and 1% bands versus buy-hold and has favorable things to say about MT. Several caveats though and good observations. A few things he said:
1) In 2000 MT was -28% vs -5% for buy-hold. There were a record 16 switches.
2) In 14 years since the 1987 crash the buy-hold beat MT every year but 1995 and 1996.
3) MT did much better for NASDAQ the DJI in recent years.
4) MT beat buy-hold by 9.44% vs 6.25% for 1926-1945. But situation reversed for 1946-2001 with the numbers being 9.25% vs 11.53%.
5) Discussed the need to have got out on Friday before Black Monday in 1987.
Roger, when you choose to overweight a category sensibly, how much is too much? Would you overweight by 2X if the cycle called for heavying up?
You've said in the past that 0% is a big bet, but what about the other side of the coin?
Thank you.
anon 1:29 I have literally hundreds of posts on that topic. do a search in the search box in the right hand side bar.
1:37, I benchmark to the S&P 500. I can't imagine ever doubling up a sector with a 10% weight but would have no problem doubling up the sectors with 3% weights if I thought the time was right.
Roger,
Would appreciate your thoughts on the following:
In Pioneering Portfolio Management Swenson refers to quantitative analysis and qualitative judgments – “Using market judgment to modify and interpret mean-variance results improves the asset allocation process”. He then goes on to develop a set of future looking capital market assumptions (which differ slightly from the past) for his ‘optimization’ models.
But in both books, he seems clear on his views of market timing. In Pioneering Portfolio Management he has a section on marketing timing, and concludes: “Serious investors avoid timing markets.” And in Unconventional Success he has a larger section on marketing timing with similar sentiments “Serious investors avoid entering the market-timing morass.”
Just his views – FWIW.
There seems to be an ever growing list of variants – 200 day MA, 15 or 16 month MA, 50/200 day exponential MA, with action triggered by various percentage points above or below these crossovers, together with personal judgment at the time. Seems like a fairly slippery slope… and IMO there’s a risk that the view of investing shifts away from long-term equity shares in businesses (as emphasized by Bogle, Graham, and Buffet) to short-term line movements on a chart… FWIW - for those who are trying, I hope you succeed.
My strategy is to use the 50/200 DMA crossover. To implement the 50 200 EMA you buy when 50 days EMA crosses over 200 days EMA and you sell when it crosses down. It’s pretty simple and mechanical.
You can complicate things and look for trends and other stuff BUT a good system is a simple one.
This is not a perfect system (it would be scary if it was!!)
In 58 years.
49 transactions (buy or sell). 44 positive 5 negatives
5 negative were small (-6.0% year 1957,-4.1% year 1960, -4.9 1960, -4.1 1978, -3.8 1994).
In 58 years some years have more than one transaction.
1960 - by far the worse 6 transactions.
1994 – 3 transactions
1952, 1957, 1962, 1968 1971 1978 1980 1984 1998 – 2 transactions
The rest are one or less per year.
Well, it’s getting better over the years….woooo scary.
From 1980 thru 2000 buy and hold did better. For me it’s OK…safety is first. If SP500 did one year 25% and I did only 15% I will take it.
Since 1950 buy and hold did better maybe 30% of the time...I think the twenties were great too.
To check how it works you can go…(big links don’t work here)
http://finance.yahoo.com/
click on S & P 500.
click on Interactive (under Charts).
above the chart click on “Technical Indicators” and select EMA (Expo moving averages) and add put 50 in line 1 periods and 200 in line 2 periods and click on draw.
Now you see the chart again
Under the chart you have dates FROM and TO…put any dates.
The only problem with chart it’s not updated during trading but it's great to look back in time.
Not to worry
If you want to follow during trading this is a much better link (thank god this one works)
http://stockcharts.com/h-sc/ui....2562896127
You can play here all day long.
This means you don’t have to wait one more day to do buy or sell (which is not a big deal anyway)
My criteria for a good system is…
1. Beat the SP500 or come close
2. Minimal transactions (no more than two a year)
3. Above 80% positive transactions
4. Negative transactions return smaller than 10%
After checking a few MA and EMA for a few indexes for different periods,
I found out that
50 day EMA with 200 days EMA works best for MY criteria.
1. It beat the SP500 most of the time.
2. Transactions are less than once a year
3. Positive transactions are about 90%.
4. Negative transactions were -6% at most.
I think it’s been reported that 200 days MA was better but I counted over 60 transactions in 10 years compare to 3 using 50/200 EMA.
I'm not sure I understood your LA, Kentucky, San Diego analogy. :)
You had a great perspective on the asset allocation.
I am curious if you have any thoughts on MREITs (ie, HTS, NLY, AGNC, CMO)? These are a play on the 2/10-year yield-curve.
There are many favorable factors playing in their favor: US government is buying the long-term agency bonds; the yield curve and the lending rates are in favor of the MREITs; the likelihood of a near-term Fed Fund rate is minor - at this point.
I am curious if you have any thoughts on this sector - which does extremely well during decreasing interest rate environments and recessionary climates.
Thank you.
either i disagree with Swensen or I am not a serious investor.
mortgage REITs, complex structures employing leverage and or relying on loans being paid back? never been a fan.
Debates concerning investment timing are typically useless because everyone knows what they mean by the word but most people actually don't mean the same thing. Broadly speaking everyone, including Swenson, is a "trader" who "times" the market(s) they are engaged in because ultimately something must be bought and that something eventually must be sold; the timing can be involuntary such as a crisis that demands liquidation or can occur as part of some buy/sell discipline which can mean almost anything including periodic asset (re)allocation, dollar and value cost averaging, quantitative triggering, etc.
If market timing is restricted to mean a relatively mechanical system in which some market indicator triggers a decision to be long the market or to be in cash (which is probably the sort of thing Swenson is referring to) then there are mixed reviews with the bulk of research strongly indicating such techniques do not work reliably, typically resulting in diminished returns over the longer term.
However most of that research focuses on nominal rather than risk-adjusted returns and the picture is somewhat brighter in the latter sense; i.e, timing as part of a comprehensive buy/sell/hedging discipline is a method of reducing risk and/or preventing catastrophe rather than a technique for goosing returns.
One can look at variance (dispersion of returns) when back-testing to get a feel for this and adding 1965 - 1982 data is a good idea too if you can find it as what we are experiencing now seems closer to that time of flatter markets and tighter credit than the 1982 - 2000 easy money bull. Better yet add M-squared or Sharpe Ratio calcs so any asset class can be compared to any other on a risk adjusted basis; e.g., stocks to bonds to RE to commodities (http://tinyurl.com/945von)
anon 8:52 mentions "..now that I am retired and cannot afford to wait 10-20 years for the market to recover. In the mean time I have seen my equity portfolio drop by 30-40%."
I "thought" conventional wisdom is to lighten up on stocks gradually as you approach retirement and when you are actually retired, you should be pretty light on risky investments. I "thought" proper financial planning would leave a retiree with an equity portfolio for which he had not much use for; therefore a big drop would not be a big deal.
random - why do you prefer the daily moving average over the exponential moving average ?
to anon 8:19,
If you are going to cut and paste Larry Swedroe's comments from the Bogleheads forum, you should at least give him credit.
simple versus exponential would be a shades of gray difference sometimes simple would be better and sometimes exponential.
i didn't think about the 8:19 post being left w/o attribution. Not cool, so I deleted it.
Roger,
You've mentioned using the 200 dma as a "barometer" for judging the "climate" for equity investment numerous times. Do you employ the same, or a similar methodology for timing a specific investment? Perhaps something you've had on a watchlist for a while, and are ready to pull the trigger? Or conversly, a holding that has, hopefully, run up quite a bit, and you're thinking about cashing in, or at least pulling some money off of the table?
not so much for individual stocks.
Roger- if the 200 DMA was such a great strategy do you not think it would be exploited by the thousands of MBA types tracking the highly competitive stock market?
There is an industry of thousands of technical analysts all claiming to have reliable strategies. There are thousands of academics tracking their results. And, there are survey articles like Burton Malkiel's 2003 review of the efficient market hypothesis (abstract, pdf) and Chapter 7 of his book.
Do you really think that successful strategies remain secret for very long? Generally, as soon as they're known, they stop working, either because the market adjusts to the information or because they were just meaningless data mining in the first place.
But, perhaps the simple 200 DMA could be the lone exception: the only successful market timing strategy in history that continues working on prospective basis?
i don't think it is great, it is right for me, that is all. the whole point of the posts is to encourage readers to seek out their own method to protect their portfolios.
As far as a secret, I have disclosed countless times reading about it in 1993 in a magazine. It is no secret.
Post a Comment