Monday, April 29, 2013

TTM Strategy Correlations

Morningstar recently put out a paper on global balanced managed ETF strategies.  In the paper they look at correlations between the managed ETF universe vs. a balanced buy and hold portfolio.  Our strategies took 3 of the top 10 spots in lowest correlation compared to the balanced benchmark:


Here is the benchmark that Morningstar used:


This highlights the difference between partially tactical strategies that are nothing more than traditional static asset allocation strategies that can move around a little bit, and fully tactical strategies.

Thursday, April 25, 2013

Another Example of Why Fixed Allocations Are a Bad Idea

Just read a good article in the Wall Street Journal about how poorly commodities have been doing:

Wheels Fall Off The Supercycle

This is just another example of why fixed allocations are a bad idea.  Commodities have been in a long bull market and unfortunately investors tend to believe that what has happened most recently will continue.  Now, most traditional asset allocation portfolios have some exposure to commodities.  I have no problem with commodities and no idea whether they will continue to decline or move up.  I just have a problem with fixed allocations to asset classes regardless of how they are doing.  A better idea is to own commodities once they start to trend upwards and don't own them as long as they are in a  downtrend.

Wednesday, April 24, 2013

One Reason We Don't Use Stops

False Rumor Causes Stocks to Plunge

I am often asked if I use stops to try to limit drawdowns.  In all of our testing we have found that every once in a while stops can help, but for the most part they don't.  Days like yesterday are another reason that stops can be problematic.  When the market briefly plunged it probably triggered a bunch of stops, causing traders to sell positions at a loss only to see the market rally moments later.

'Target' Funds Vulnerable to Rate Rise

http://online.wsj.com/article/SB10001424127887324763404578432791652311774.html?mod=ITP_moneyandinvesting_0

Great article in the Wall Street Journal this morning on how target date fund investors could be at risk when/if interest rates increase.  Target date funds are supposed to get more conservative as you get older, the thinking being that the closer you get to needing your money the more conservative your investments should be.  This thinking has a number of major flaws:

1. What is conservative?  According to target date funds it is adding bonds because over the past 30 years bonds have gone up, and in years that stocks have done poorly bonds have done well.  So in the past bonds have been a risk reducer in portfolios, but if interest rates start to rise bonds will go down in value.  The true definition of conservative is whether or not you can lose money.

2. Your age and time horizon matter very little as to whether you should be conservative or not, what is going on in the market is much more important.  Nobody, regardless of age, should be trying to chase stock market gains during a market downturn like 2002 and 2008.  Just about everybody should be in stocks during a market upturn.  The key to safety is being in harmony with market trends, not pulling money out of stocks and shifting to bonds regardless of what happens in the market.

Monday, April 1, 2013

Asset Allocation's Ugly Side

I just read an article in the Wall Street Journal about how commodities have not done well this year in the face of the market rally.  Stocks, Commodities Break Up the Band

A traditional asset allocation portfolio would usually have an allocation to commodities.  It would also usually have an allocation to foreign stocks (emerging and developed) and bonds along with US Stocks.  

When an investor adds bonds to a portfolio they expect they will drag on returns during a market upturn.  They accept that for the supposed protection during market declines.  I have written in the past about how bonds are likely to go from being a risk reducer to a risk enhancer in portfolios so I won't rehash that here.  When they add commodities they typically hope that commodities will rise with stocks and might provide some protection during a market decline.  While US stocks have gone up quite a bit this year the traditional asset allocation portfolio is having some problems so far.  Here are the year to date returns of some ETFs that track these other asset classes:



Commodities---iShares S&P GSCI (GSG): .34%
Bonds- Barclays Aggregate Bond (AGG): .07%
Intl Developed- iShares MSCI EAFE (EFA): 3.73%
Emerging Market- iShares MSCI Emg Mkt (EEM): -3.56% 

S&P 500:   10.61%