She replied, in good spirit, that she was there to tell it how it is and there is no reason not to make money with this. Presumably she trades these opinions and advises the bank's clients to do likewise. You can decide for yourself whether or not you want to trade off of her suggestions but what is useful here is that the anchor introduced emotion into the discussion and without hesitating she removed emotion from the equation and her tone in doing so was that this was no place for emotion and she is right.
Far too many people, maybe because of what they see on TV or read in print, do let emotions into their market process.
In Robert Arnott's most recent article on IndexUniverse he makes a reference to a sixteen asset class portfolio that is detailed in the footnotes as follows;
Merrill Lynch (ML) U.S. Corporate & Government 1-3 Year
Lehman Brothers (LB) U.S. Aggregate Bond TR
LB U.S. Treasury Long TR
LB U.S. Long Credit TR
LB U.S. Corporate High Yield TR
Credit Suisse Leveraged Loan
JPMorgan (JPM) EMBI + Composite TR
JPM ELMI + Composite
ML Convertible Bonds All Qualities
LB Global Inflation Linked U.S. TIPS TR
FTSE NAREIT All REITs TR
DJ AIG Commodity TR
S&P 500 TR
MSCI Emerging Markets TR
MSCI EAFE TR
Russell 2000 TR
Man, that's a lot of asset classes. Apparently Arnott and his crew did research on how these 16 asset classes, equally weighted, did and the result was not good which is sort of what the article is about. The equal weighting of the 16 baffles me and I find the number of asset classes to be daunting. Most people put 30-40% into fixed income and as I count, ten of the 16 are fixed income and if I'm seeing right there is no slot for municipal bonds.
Arnott has forgotten more about this stuff than I'll ever know which makes a good point. Building a fixed income allocation with the above as a starting point makes the task very difficult. If you are an investor, as opposed to a trader, and you want treasury exposure you can buy the individual issues very easily. Ditto munis. If you want exposure to a couple of corporates it might makes sense to have a mix of individual issues and a fund. If you want foreign sovereign exposure and have access to individual issues I think that is better but there are now several ETFs for the space too. TIPS are easily accessed and then if you want to get zesty with a small portion, like maybe 5%, for emerging market, convertibles or high yield you would be covering all the bases.
I think a very diversified fixed income portfolio can be built with four or five bond asset classes. One thing to not lose sight of is that if rates are low that means prices are high. How much buying do you want to do when prices are high?
Finally from the "What did you say?" file a reader opined that the search for exotic or alternative investment products is a waste of time. He said they could be more harmful than helpful and that he never needed them before. For him or anyone else it might be a waste of time, used improperly they could be harmful and if you don't think you need them then you probably don't.The big macro behind my utilization of these products (in moderation, can't stress that enough) and my writing about them ties in with trying to explore the concept of risk adjusted return. If I could build portfolios that went up 80 basis points every month in perpetuity with no standard deviation I would. While that is impossible building some of that smoothing out the ride into the portfolio is very worthwhile.
As a matter of philosophy I believe there are times to overweight volatility and underweight it and adding in a couple "alternative" vehicles or subsequently taking them off is a great way to manage the volatility. Moving 5% of the portfolio from close to not beta into the kind of high beta will have a very noticeable impact on a portfolio.
The reader says he hasn't needed alternative investments before, fair enough but I believe that portfolio construction and management is an evolving field of study. Fifteen years ago there was no ETF industry (I don't think two funds constitutes an industry if MDY even existed then) and now they are a mainstay. Options didn't come into existence until the 1970s, there have been other past innovations that have become financial market staples and there will be others. Not all of them have been good and not all of the future developments will be good either but the industry will evolve and some of the innovation will be a net positive. I'm not sue why someone would choose to ignore it.
25 comments:
the unions have destroyed the car makers, airlines, school system, etc.
The bankers have damaged most everything else.
Politicians on both sides of the aisle do more harm than good.
Last century was the American century. This century America will not lead.
People had better consider alternative countries even if they do not want some of the more unusual choices you commonly write about.
"Get zesty" with fixed income. Cute!
I'm a keep it simple kind of investor and have some sympathy for the reader who questions the need for alternative investments. I might call them exotic investments to differentiate them from options like etfs that have become mainstream.
For me, the easiest way to dampen volatility is to move some money to cash. I don't see the benefit of trying to find investments that go down less than the market, especially when they start to mix in leverage, options, currency hedges, etc. It never ends well for me and is better left to pros like yourself, I think.
When I want to add volatility, I move cash back into the market and overweight the market movers. It's not hard using moving averages and bowing a bit to Jim Rogers, certainly not Rob Arnott.
Roger: As a follow-up to your Saturday video discussion, Dan Solin has his account of the CNBC "debate" with Cramer today at http://www.huffingtonpost.com/dan-solin/the-solin-cramer-smackdow_b_188535.html
Solin contrasts what he sees as Bogle's advice for the last ten years for a moderate portfolio (40% bonds, 60%stocks) with Cramer's various recommendations over the same period. Pretty stark juxtaposition of passive vs. active approaches, or is it maybe steady vs. frenetic?
I was sure you'd post on alternative energy and water themes for earth Day, Roger. Thanks for not belaboring the obvious.
Great post Roger...thanks again.
I've been eyeing DUC...)not asking
for a buy or not to buy) just
wondering if you think this is low risk and if you know of other funds
like this that I can compare?
Or if anyone else reading knows
about this fund...
i don't know DUC, nothing against it, it is heavy in utilities and financials. any problems there that they don't see coming will hurt the fund.
obviously every product has some drawback.
Nice Randoms for today. And, Anon 6:02 makes an excellent point about moving to cash.
My spouse just received a quarterly newsletter from a statewide pension fund that serves municipal governments in that state. The fund lost 25 percent last year -- $6 billion (and you thought you had big losses.) The director of the pension organization wrote that there was nowhere to hide last year. ... Umm, apparently his managers forgot about cash. (Cash would explain why our personal portfolio last year fell considerably less than 25 percent.)
Wait for it -- the pension honcho tells the pensioners not to worry about their benefits. The local governments will increase their payments into the fund. How? By raising taxes and fees! ... And that in turn makes me just a touch cautious about muni bonds.
BillM
A while back there was something on Bloomberg about public pensions in Chicago taking abnormal risks within to meet obligations (borrowing at 6 or 7% hoping to make 9%).
Hogwash,hogwash,hogwash. Run some correlation studies for us. Prove your point. One stock fund and one bond fund. Study both till you drop. The rest is bull designed to keep wall street and the rest of the bloodsuckers in new cars and vacation homes.
wow. prove it to you? we're not handing out fish here.
you have over 3300 posts on this blog since 2004 to look at and draw your own conclusion.
put down your own nickel for a service to run the correlation and do some work for yourself.
" Not all of them have been good and not all of the future developments will be good either but the industry will evolve and some of the innovation will be a net positive. I'm not sue why someone would choose to ignore it."
I had a portfolio recommendation from both Fidelity and Vanguard several years ago. They both used a large selection of OEF's, no ETF's or individual stocks. Neither planner used TIP's at the time. When I asked why, they said they had insufficient history to use in portfolio construction. I would suggest that not using new products is a mixture of professional caution and fear. For the record, I did not use either service. Neither liked individual stocks, and neither referred to the twenty page document I filled out prior to handing me a canned portfolio.
Sam
So you had a good experience then?
From a slightly bigger picture you describe a group think that net net is negative. This occurs in the context you bring up and just about every other aspect of analysis.
"We were in line with everyone else."
Experience was perplexing at best. I agree with your last comment. Sorry, I don't understand the "net net is negative" phrase.
Appreciate your thoughts,
Sam
there is value in not going overboard with new investment products or asset classes but there is also value in exploring, learning and small scale implementation of new things.
so a balance should be struck. the advisers unwilling to have any of this, IMO hurt their clients/ not ruin them but do hold them back.
The US stock market is the most "alternative" asset class going.
Invest in real assets and do not gamble in the US markets giving away huge fees to financial advisors.
"anon 2:31 are you trying to heckle me about the Celtics?
Too bad so sad the Celtics won the second game. Not sure what your deal is."
No heckling at all. I also authored the first post when the bulls beat the celts. I'm a long time celtic fan from the russell-auerbach era who happens to live in bulls-land. "too bad, so sad" is a favorite saying of a co-worker of mine. I'm just a regular reader of your blog who likes sports but does not take it too seriously, as it occassionally seems some 40-ish blog authors do.
Seems Garnett is really hurt ? Personally I don't think it matters, I think this is the lakers year, I love how they play.
But seriously, what are the chances for a cubs-red sox world series this fall ?
Wow! 94 new ways to blow yourself up:
http://www.indexuniverse.com/sections/newsinfocus/5742-proshares-files-for-3x-leverage-on-97-new-etfs.html
Roger,
Regarding Chicago pension funds doing silly/stupid things; were you referring to the Il. 529(?) education plan(think its called "Bright Star") that took a pretty big hit (25%ish) last year. Evidently, Oppenheimer manages these funds, and the state is going to be looking to them to make good on the losses, it was said on the local news.
Jan
Jan I think it was the pension for transit authority that issued bonds in the manner i described above.
I'm not clear on why you'd go to Fidelity and Vanguard for investment recommendations and expect them to recommend individual stocks......
Roger- I watched Nicole's interview and she seems to agree with Serraperre and Mauldin. I was curious if you ever acted on her recommendations and are considering increasing cash positions and/or short positions?
when demand is unhealthy i want to have much less volatility than the market. for now that is the case. i've mentioned adding double short up a little higher but that was months ago and depending on the path taken i might still do that.
The LEAST of Chicago (and Illinois') problems are 529s.
Google "Dust Storms" out West the big dust storms are starting. A huge dust storm shut down I-5 in California this past weekend.
The reason the great, great depression is still a few years is off is because so are the dust storms.
We are in the 1890s or so, there will be one more bang up boom and then a crash that none of us want to be alive for.
The dust storms will destroy California agriculture the breadbasket to the America and then we are in big, big trouble.
My financial planning consists of purchasing land in north and east states attached to stable bodies of fresh water.
and drinking tons of california wine because it will not be around in 10 years.
Of course Rodger will say that is extreme thinking and the market will bounce back, blah blah, yes the market did bounce back in the 30s after a few world wars but most people standing in food lines were not thinking about the market, nor will you.
Jim Rogers got it right again, invest in farmland up in Canada.
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