'Hope and Hold' ETF Portfolios Somewhat Worse for Wear

My family asked that, while on a 4-day break, I refrain from posts to the ETF Expert blog. We all needed a weekend of quality time. Little did I know that 9/29/2008 would register a "777" on the Richter Magnitude Scale for stock market damage. "The House didn't pass the rescue package?"

Fortunately, I've had a large percentage of assets in cash and income-oriented assets for quite some time. (See the "Wisdom of Avoiding the Big Loss.") Nevertheless, I still needed to talk to colleagues via cell phone and Internet to determine the damage to core stock holdings.

Medical Devices (IHI) did take a beating, but not quite as bad as the market. And my favorite quasi-ETF, Berkshire Hathaway (BRK.B), was actually up. (Review "Does Berkshire Represent the Best of Exchange-Traded Funds?")

We own next-to-zero international ETFs at the moment. And with roughly 30% or less in domestic stock ETFs... with 70% in cash/bond/income ETFs... the bulk of the bear's damage has been minimized. Indeed, my clients and I could rest a bit easier. (Not easy... but easier!)

That's not to say the bear didn't hand us significant losses here in 2008. Short of predicting the severity of 2008's bear ahead of time, just about every fund manager and investment adviser has been roughed up.

Yet "buy-n-hold-n-hopers" have been roughed up, mauled, taken to the cleaners, beaten with an ugly stick, and left hung out to dry. That's just a few key cliches to describe the mistake of holding-n-hoping.

In a 9/17/08 post, I put together a typical hold-n-hope asset allocation mix. It was down 15.6% through mid-day 9/17/08. How much worse for the wear is this portfolio through the end of 3rd quarter? Down 20% or more in 2008?

And while there are some ETF writers who have earned my respect, their quarterly rebalancing does not strike me as proactive enough. When protecting assets, "tweaking" at arbitrary moments in time (e.g. 12/31, 3/31, 6/30, 9/30) doesn't quite cut it.

For instance, a tactical allocator named Tim Middleton at MSN Money has made many a wise decision in the past. He has written many, terrific articles. Yet most of the "performance" came in the throngs of the 2003-2007 bull market.

Now Mr. Middleton's ETF portfolio is down more than 13% in Q3 alone. And by his own acknowledgment, he feels trapped. He writes, "The road ahead looks just as dicey, but we're trapped. It's too late to flee to safety and too early to know where to go next. So I'll stand pat for the fourth quarter."

The worst 4 words in investing... "I can't sell now." In fact, by making changes on a quarterly basis alone, here's what Mr. Middleton is standing pat with:

iShares Natural Resources (IGE)							5%
Vanguard Growth (VUG)							15%
Powershares MidCap Growth Portfolio (PWJ)							12.50%
Vanguard Small Cap (VBK)							10%
iShares MSCI EuroAustralAsia Growth (EFG)							15%
Vanguard Emerging Market (VWO)							5%
Claymore BRIC Emerging Markets (EEB)							7.50%
Vanguard Total Bond (BND)							12.50%
ICF Cohens Steers REIT Realty (ICF)							7.50%
Cash Schwab Money Market							10%

Whoa... MSN Money sure needs a bull market in Q4. Quick!

Standing pat with 42.5% U.S. stock exposure and 27.5% international/emerging market exposure sounds great... in theory. 70% stock exposure and 30% income exposure is fairly standard fare; that is, until a bear claws away at one's theoretical hold-n-hope portfolio.

The problem here isn't the 20% overall portfolio losses through 9/29/08. The problem is perfectly described by Mr. Middleton himself... "trapped." When someone states that "it's too late to flee for safety, and too early to know what to do next," how much confidence can one place in that plan?

It wouldn't surprise me if Middleton reconsiders quarterly tactical allocation altogether. Perhaps it'll move to a monthly schedule, like NoLoad FundX. Or perhaps it'll move to an event-driven tactical allocation that takes into account presidential elections. (ETFs for Obama, ETFs for McCain?)

Granted, I am being a tad bit facetious. Yet the point still stands: Even at the risk of missed opportunity, there are unscheduled moments when protection is paramount.

Comments

[ladders11:]

Sorry that I clicked your link to what you allege to be your proof of ability ("Wisdom of Avoiding the Big Loss.") - great call on the dividend funds Gary too bad they're overweight financials. You and the MSN guy both have no clue but at least he can write coherently.

2008 Oct 01 09:41 AM

[Seeking Advice:]

I think most of us who joined the buy and hold camp ("hold and hope") in the past few years are having their patience tested. It works best obviously if you have a rather long investment time horizon - at least 10 years. I've seen the wisdom of taking a modified approach over the past 2 years that provides me some flexibility to that strict approach though it has not saved me from losses. I worry about buy-and-holders who are hoping to retire in 5 or 7 years and grinning and 'bearing' it through this shaky economic situation. Many may find they will not have time to recover and will have to significantly alter their plans.

2008 Oct 01 09:47 AM