Wednesday, June 20, 2012

That's Not What You Get Paid For

I don't usually listen to CNBC but just happened to have it on in the car today.  Maria Bartiromo was interviewing a money manager who went to 100% cash ahead of the Fed announcement.  The first words out of her mouth were "That's not what you get paid for".  

That is what is wrong with the financial services industry and media.  Protecting clients from large declines is exactly what we SHOULD get paid for.  Anybody can make money in an up market.  The reason the average investors hasn't made any money (if they are lucky) the past 10 years is that they give back all of their gains in down markets. 

Saturday, June 2, 2012

Wall Street Journal Weekend Reading

Same Returns, Less Risk

How Much Gold Do Investors Need, Zero

Is Now The Time to Buy Junk Bonds

The first article is about risk parity.  I believe that risk parity is the future of asset allocation so I am happy that the WSJ is addressing it but for it to be optimal it must be combined with tactical asset allocation.  A buy and hold approach is better with risk parity than it is with Modern Portfolio Theory but it is still flawed.  However, having a number of tactical models and weighting them by risk parity is the optimal way to build a portfolio.

The other two articles are the typical is now the time to buy X stuff.  Gold was up yesterday so should you buy it?  Junk bonds were hot early in the year now they are not so should you buy them.  The answer is simple, buy what is in an uptrend and sell what is in a downtrend.  Could this be the bottom for Gold?  Maybe.  Could the bottom be much further away?  Maybe.  It is much safer to stay in harmony with market trends than it is to try to pick market bottoms.

Friday, June 1, 2012

Where is the Safe Haven?

As we end an awful month for the market may investors are looking for safe havens to protect their money.  The way to find safe havens is easy, just follow the trends.  We hear a lot of great narratives about how investors should be buying gold, but the biggest gold ETF, GLD, was down 6.34% last month according to Morningstar.  By my definition a safe haven doesn't go down as much as the market. Does that mean gold won't eventually be the place to be?  No, at some point it could (and very well might be because it can act as a surrogate currency and certainly would be better than owning Euros or Drachmas) but unless you can call the bottom it makes no sense to invest until the trend turns around. 

That leaves Treasury Bonds (or cash if you are content to protect and don't care about making money) as the only safe haven.  The largest long term Treasury ETF, TLT, was up 9.02% last month according to Morningstar.  Treasury yields also told us that the rally we saw in the market a couple of days ago wasn't real as the market rallied but yields barely budged.

This trade is not for the faint of heart, it is based purely on fear and that can change on a dime.  Also, for long term buy and hold investors (which doesn't work but people still try to do it anyway) Treasuries at these yields don't make a lot of sense.