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  • Allocation Advice For The Do-It-Yourself Investor [View article]
    Paul,


    I am sorry that you found the article confusing. Perhaps your confusion rests in my description of "upside performance" and "downside risk."

    For clarification, I distinguish between upside performance (e.g., 15% annual gain versus 10% annual gain) and downside performance (e.g., -9% annual loss versus -29% annual loss), where performance is relative. At this point in the cycle, I believe it is extremely sensible to reduce the risk of loss on the downside more than chase the gains on the upside.

    Separately, for the hundreds of families that I represent, very few of them care about "outperforming." Yet they care a great deal about the risk of losing the bulk of their life savings. They do not want to hold-n-hope that everything works out down the road. They'd like to lose less when the fit hits the shan (a la 2000-2002, 2008-2009), and still maintain their lifestyles.

    It follows that many folks do not care about outperforming. And yet, they care a great deal about downside risk.

    GG
    Jul 22, 2015. 12:06 PM | 2 Likes Like |Link to Comment
  • Allocation Advice For The Do-It-Yourself Investor [View article]
    M3442,


    We are not making shifts between IWF, OEF and SPY. They are slightly different versions of the large-cap space. We are, and have been, making tactical asset allocation shifts.

    For instance, if one has 15% of his/her portfolio in higher-yielding income and 20% of his portfolio in investment grade, he/she might shift to 5% higher-yielding and 25% investment grade and 5% cash equivalents. Similarly, if one has 35% in larger-caps and 30% in smaller-caps, he/she might shift to 50% larger caps, 5% smaller caps, and 10% cash equivalents.

    Here's where many of my clients are currently at:

    50%-55% equity (large cap, almost entirely)
    25%-30% income (domestic, intermediate, investment grade, almost entirely)
    15%-20% cash/cash equivalents

    Equity would be shaved in conjunction with trendlines/stops... raising the cash component. We do no t buy-n-hold and we would not buy-n-hold a 50% large-cap stock weighting through a bear.


    Hope that helps.

    GG
    Jul 22, 2015. 11:44 AM | 1 Like Like |Link to Comment
  • Allocation Advice For The Do-It-Yourself Investor [View article]
    MedTech,

    Pulling a quote out of the context of the article does not reflect the intent of the article. It is possible that I did not express myself well in the article... so I will try to clarify.

    Get out of small caps. Raise your cash levels. Shift to larger caps if you desire equity exposure and you are choosing between small/large.

    Cash/cash equivalents and large-caps provide relative safety when the median P/E and median P/S for small caps are the highest that they have ever been in the history of U.S. stock markets... and when, stock market breadth (internals) are eroding by the day.

    As for your comment "sell low, buy high" -- selling small caps now is selling them near their all-time highs. It is not selling them low. Adding to large caps may be buying high, but I am not recommending 100% cash. Here is what I am recommending:

    50%-55% equity (large cap, almost entirely)
    25%-30% income (domestic, intermediate, investment grade, almost entirely)
    15%-20% cash/cash equivalents

    Equity would be shaved in conjunction with trendlines/stops... raising the cash component.

    GG
    Jul 22, 2015. 11:20 AM | 2 Likes Like |Link to Comment
  • Allocation Advice For The Do-It-Yourself Investor [View article]
    MB,

    50%-55% equity (large cap, almost entirely)
    25%-30% income (domestic, intermediate, investment grade, almost entirely)
    15%-20% cash/cash equivalents

    Equity would be shaved in conjunction with trendlines/stops... raising the cash component.

    Best,

    GG
    Jul 22, 2015. 11:07 AM | Likes Like |Link to Comment
  • Greece, Puerto Rico Or China? Debt-Fueled Excesses At The Heart Of Them All [View article]
    One looks for relative safety in a world where nothing is safe. Cash is safer than stock, short-term munis are safer than long-term convertibles, and 3-7 year treasuries are safer than Spanish debt.

    If faith in the Fed erodes, we will see it in the benchmarks. And I will reduce exposure there. All one can do is assess the market internals, and respond accordingly.
    Jul 7, 2015. 04:17 PM | 3 Likes Like |Link to Comment
  • When Market Breadth Stinks, Cash Is The Mouthwash [View article]
    kydder,

    Our stop-limit loss orders depend upon two criteria: (1) the perceived risk of the asset, (2) the weight in the portfolio. The lower the perceived risk, the tighter the stop-limit loss order. For example, preferreds and high yield bonds may be less risky than dividend stocks which may be less risky than growth stocks which may be less risky than small caps which may be less risky than foreign securities and so forth. You are talking about decisions that typically range between 5% and 10%.

    However, the weight in a portfolio is equally important. The greater the weight, the tighter the stop. An asset that has a 10% weight in the portfolio moves the needle of the account value more than one that is only a 5% weight. So a typical stop of 7%-8% on a large cap position would be too tight if it represents only 5% of a total portfolio. To give it more room, we might have 1/2 the position stopping out at an 8% drawdown from the highest point reached and the other half at 14%. If only the first half stops out, then the 1/2 of your position that still remains will still contribute positively in a turnaround. If the second stop hits, the depreciation (effectively 11%) on an asset with a 5% weight is still less than 8% depreciation on an asset with a 10% portfolio weight.

    We also employ key trendlines when making tactical asset based decisions. They can be used in conjunction with (and in some instances, instead of) a stop-limit loss order approach.

    Hope that helps.

    G
    Jun 30, 2015. 03:54 PM | 1 Like Like |Link to Comment
  • The Risk Of Owning Stock Assets And Holding Stock Assets Right Now [View article]
    MM

    Our stop-limit loss orders depend upon two criteria: (1) the perceived risk of the asset, (2) the weight in the portfolio. The lower the perceived risk, the tighter the stop-limit loss order. For example, preffereds and high yield bonds may be less risky than dividend stocks which may be less risky than growth stocks which may be less risky than small caps which may be less risky than foreign securities and so forth. You are talking about decisions that typically range between 5% and 10%.

    However, the weight in a portfolio is equally important. The greater the weight, the tighter the stop. An asset that has a 10% weight in the portfolio moves the needle of the account value more than one that is only a 3% or 5% weight. So a typical stop of 7%-8% on a large cap position would be too tight on a position that is only 5% of a total portfolio. To give it more room, we might have 1/2 the position stopping out at an 8% drawdown from the highest point reached and the other half at 14%. If only the first half stops out, then the 1/2 of your position that still remains will still contribute positively to the account. If the second stop hits, the depreciation (effectively 11%) on an asset with a 5% weight is still less than the 8% depreciation on an asset with a 10% portfolio weight.

    We also employ key trendlines when making tactical asset based decisions. They can be used in conjunction with (and in some instances, instead of) a stop-limit loss order approach.

    Hope that helps.

    G
    Jun 28, 2015. 06:09 PM | Likes Like |Link to Comment
  • The Risk Of Owning Stock Assets And Holding Stock Assets Right Now [View article]
    Mark,


    >>Based on inflation adjusted numbers, stocks are well below all-time
    >>highs.

    And this should tell you a little something about the reality of buy-n-hold failure with the dot-com era. Investors in the 90s increased their exposure to tech - knowingly or unknowingly in their mutual funds/401ks. They were positioned for New Economy growth via the NASDAQ. Buyers-n-holders of the NASDAQ and tech only recovered in price at 5000... after 15 years. On an inflation-adjusted basis? It will need to be 7000 to get to a 0% return.

    >>Key financial ratios such as P/E are nowhere near 2000 dot.com
    >>bubble levels.

    You may need to do your homework on this one. The P/E for the median stock on U.S. exchanges is higher than the dot-com era. It is the highest that it has ever been. The P/S ratio, which may be a better valuation methodology, is at its highest ever in history as well.

    Moreover, I do not believe one can find a long-standing valuation method or ratio where stocks are not at the highest or 2nd highest in history. So if P/B and P/CF and market cap/GDP and Tobin's Q and DCF -- if all of these methodologies indicate the second most expensive market in history -- that's a net positive because we're not in the dot-com era bubble? Please, I encourage you... look at the 3, 5, 7 and 10 year returns for those who buy when stocks are as expensive as they are today.

    >>3. Even high tech stocks like AAPL, MSFT, etc now pay about 2%
    >>dividends, but paid no dividends in 2000.

    This, my friend, this is a venerable point. Personally, I am raising cash to buy the dividend payers lower, but I do not think one will be harmed over a 10-year time frame in buying AAPL or MSFT. I do think one may have to deal with a massive margin debt unwind, which could see popular stocks lose typical bear market percentages of 30%. But that doesn't mean everyone need wait for the bear.

    Gary
    Jun 26, 2015. 06:18 PM | Likes Like |Link to Comment
  • The Risk Of Owning Stock Assets And Holding Stock Assets Right Now [View article]
    The author suggested the exact opposite. The author wrote, "The likelihood that bonds will outperform stocks over the next 15 years may be pretty darn slim."

    The author essentially believes that if you wish to beat the guaranteed 2.4%-2.5% of a 10-year treasury over the next 10 years, then you would be wise to avoid additional stock exposure in 6/2015; you should wait to add stock exposure when valuations are far more reasonable. Stock assets may be a wonderful 15-year opportunity later in the year, or in 2016, or in 2017, but they are not likely to be so from 7/1/2015-6/30/2030... not in buy-n-hold capacity.

    Like Total, you may have missed the point in my commentary. And it has little to do with bonds outperforming stocks over the last 15 years. That's just the data for the last 15 years, demonstrating that stocks tend to be a poor investment when you buy them at sky high valuations (a la 6/2000 and here at 6/2015). Buying them on 6/2002... now that is what one should be considering... buying when valuations are reasonable.

    Here, again, is what the article's intent is:

    The intent of this piece is not to assess stocks as an asset class; rather, the purpose is to talk about buying stock assets and holding stock assets right now. If you buy stocks when valuations are exceptionally high - whether you value them by trailing/forward/cyclical P/S P/E/ P/B/ P/CF, Tobin's Q, market cap/GDP (Buffett ratio), DCF - your 10-year outlook could not differ significantly from the current 10-year yield.

    To the extent that every long-standing method of stock valuation is not applicable because interest rates are so low, one can make a case for the sensibility of more stock exposure today. People made the same mistake in the late 90s when they dismissed valuations in favor of the "New Economy."

    Again, the intent of the article is not to say stocks are bad for your health or that bonds are better for your health over 15-year intervals. Clearly, that is not the case. Stocks are usually better than bonds over most rolling 15-year intervals.

    What is the case, however, is that when investors buy stock assets at sky-high valuations, the prospects over the next 15 years are poor. Extremely poor. That's where valuations were in June of 2000. (That is where they are at in June of 2015.) Buying stocks in June of 2002, however, when stock assets were more reasonably priced, led to better 3, 5, 7, 10 returns (and will lead to better 15 year results).

    Gary
    Jun 26, 2015. 05:02 PM | 1 Like Like |Link to Comment
  • The Risk Of Owning Stock Assets And Holding Stock Assets Right Now [View article]
    Total R,

    I think you may have missed the point of my commentary. The intent of this piece is not to assess stocks as an asset class; rather, the purpose is to talk about buying stock assets and holding stock assets right now. If you buy stocks when valuations are exceptionally high - whether you value them by trailing/forward/cyclical P/S P/E/ P/B/ P/CF, Tobin's Q, market cap/GDP (Buffett ratio), DCF - your 10-year outlook could not differ significantly from the current 10-year yield.

    To the extent that every long-standing method of stock valuation is not applicable because interest rates are so low, one can make a case for the sensibility of more stock exposure today. People made the same mistake in the late 90s when they dismissed valuations in favor of the "New Economy."

    If discussing the data for the last 15 years is cherry picking, so be it. The data are the data for the the last 15 years. Again, the intent of the article is not to say stocks are bad for your health or that bonds are better for your health over 15-year intervals. Clearly, that is not the case. Stocks are usually better than bonds over most rolling 15-year intervals.

    What is the case, however, is that when investors buy stock assets at sky-high valuations, the prospects over the next 15 years are poor. Extremely poor. That's where valuations were in June of 2000. (That is where they are at in June of 2015.) Buying stocks in June of 2002, however, when stock assets were more reasonably priced, led to better 3, 5, 7, 10 returns (and will lead to better 15 year results).

    Gary
    Jun 26, 2015. 11:57 AM | 1 Like Like |Link to Comment
  • The Risk Of Owning Stock Assets And Holding Stock Assets Right Now [View article]
    Total,

    I think you may have missed the point of my commentary. The intent of this piece is not to assess stocks as an asset class; rather, the purpose is to talk about buying stock assets and holding stock assets right now. If you buy stocks when valuations are exceptionally high - whether you value them by trailing/forward/cyclical P/S P/E/ P/B/ P/CF, Tobin's Q, market cap/GDP (Buffett ratio), DCF - your 10-year outlook could not differ significantly from the current 10-year yield.

    To the extent that every long-standing method of stock valuation is not applicable because interest rates are so low, one can make a case for the sensibility of more stock exposure today. People made the same mistake in the late 90s when they dismissed valuations in favor of the "New Economy."

    If discussing the data for the last 15 years is cherry picking, so be it. The data are the data for the the last 15 years. Again, the intent of the article is not to say stocks are bad for your health or that bonds are better for your health over 15-year intervals. Clearly, that is not the case. Stocks are usually better than bonds over most rolling 15-year intervals.

    What is the case, however, is that when investors buy stock assets at sky-high valuations, the prospects over the next 15 years are poor. Extremely poor. That's where valuations were in June of 2000. (That is where they are at in June of 2015.) Buying stocks in June of 2002, however, when stock assets were more reasonably priced, led to better 3, 5, 7, 10 returns (and will lead to better 15 year results).

    Gary
    Jun 26, 2015. 11:48 AM | 2 Likes Like |Link to Comment
  • Revenue Growers In A Late-Stage Stock Bull [View article]
    W.E. Coyote,


    If components of the multi-asset stock hedge index (MASH Index) are out of favor, we do not use them in our active management. That's the benefit of tactical asset allocation. We can downshift from the success of last year's long bond allocation to 3-7 year treasuries (a la IEI) or 7-10 year treasuries (a la IEF). One cannot do that when they own the MASH index... you own it, you effectively own its components until and unless you sell the index investment.

    When cash is raised, we might seek out another opportunity at that particular moment. We might allocate to the MASH Index or some of the components.We might use the money market/cash for future opportunities and/or near-term safe harboring. Discretion.

    For those who wish to hedge against a violent and severe downturn, they may wish to own the MASH Index passively or they may wish to select some of its components. There is no leverage or margin or shorting or inverse daily tracking; there is not a single component approach. Instead, assets that typically demonstrate slightly negative correlations to stocks over the long-term, and strong negative correlations in stock bears, exist inside the singular index.

    If a strong bearish downturn comes, it is likely that carry trades will unwind (yen), safe haven currencies will be popular (Swiss franc, greenback), gold would probably get bid up, sovereign debt like German bunds would become sought after again, and long-term treasuries would reign supreme. Are they working today? With the prospect of rate hikes and short covering? With stocks near record peaks? Nope. But they would.

    Best,

    Gary
    Jun 24, 2015. 05:24 PM | Likes Like |Link to Comment
  • Sky High Valuations? Lusterless Economy? It Just Doesn't Matter! [View article]
    >>Are you suggesting therefore that the negative correlation of Bonds & Stocks
    >>will end as soon as the IEF takes out the previous low of 104?

    The non-correlation/slightly negative correlation ended a while ago, for the most part. In fact, I have advised people to hold a higher level of cash than normal, primarily because traditional diversification has given way to a positive correlation between these asset classes.

    Let's look at last year. Throughout 2014, bonds and stocks gained ground. They were positively correlated. Heck, intermediate and longer-term treasuries far outpaced stock returns.

    Let's look at 2013, then, for clues about what could happen in 2015. In 2013, both bonds and stocks were gaining ground in the 1st half of the year (positively correlated), up until late May. Then came the taper tantrum. It killed bonds, and it dragged on stocks, but only about 7% off the top. Bonds continued to unwind, while stocks resumed their uptrend. So the negative correlation was primarily seen in the 2nd half of 2014.

    Let me switch to the 10-year for the purpose of this line of thought. I am basically saying that if the 10-year yield breaks above 2.5% and stays above 2.5%, and heads for 3.0%... if it does so at a relatively quick pace... stocks would correct in the 10% range. You would see the positive correlation. In contrast, if it holds below 2.5% and heads towards 2%, stocks would likely enjoy the lower borrowing costs, regardless of what the Fed does with the overnight rate. So again, you might see a positive correlation at that time.

    Where it gets more complicated is a bearish stock market turn. That could happen with a variety of different scenarios and a variety of different reasons. If stocks turn decidedly bearish, treasuries would be the safe haven asset of choice. The 10-year yield would likely break below 2%. And then you'd be witnessing the negative correlation more attributable to risk-off environments.

    Best,

    G
    Jun 16, 2015. 04:58 PM | 3 Likes Like |Link to Comment
  • Sky High Valuations? Lusterless Economy? It Just Doesn't Matter! [View article]
    Exactly :)
    Jun 16, 2015. 04:28 PM | 3 Likes Like |Link to Comment
  • 'Taper Tantrum' Round 2? It's More Serious For Stocks This Time Around [View article]
    Come on now, U44.

    My "call" on interest rates was one of the most successful and entirely contrarian "calls" from December of 2013 when I first made it... straight through March of 2015 when I wrote "Selling Winners Is Never Easy." Clients and readers benefited from the barbell approach that I spoke about frequently, such that TLT/EDV/BLV owners locked in 40%-50%. I remained bullish on longer-term treasuries from 12/2013 all the way up until stop-limit loss orders hit and prices breached trendlines.

    Here, again, from March on selling winners:
    http://bit.ly/1by2mQh

    If the question is whether or not I believe interest rates will go back down, you know that I do. The unwinding from the compressed spring action will eventually settle (much like 2013's taper tantrum). Yet until the bottoming out process occurs, 3-7 Year Treasuries (IEI) have been the recipient of my tactical shift in the barbell approach to the late-stage bull market.

    I realize that you would like money managers and Registered Investment Advisers like myself to acknowledge where they were wrong. So let's do that:

    1. I anticipated a genuine correction of 10%-20% in 2014. I was wrong. The October-November pullback was close, but no cigar.

    2. I expected WTI crude to bottom out closer to $60. I was wrong. It appears to have bottomed closer to $45. I bought too soon, and respective ETFs have struggled to break even.

    3. I frequently expressed a preference for Germany over other euro-zone members. I was wrong. The regional HEDJs/VGK choice provided a better risk-reward opportunity than HEWG/EWG.

    Tactical asset allocation shifts are part of my process. There are no asset classes or asset types that I buy-n-hold indefinitely. Depending on the client, cash levels have been raised to 15%-25%. Both equities and income producers have been lowered as correlations have been elevated and it is becoming increasingly difficult to protect via traditional diversification. Ergo, more cash for future buying opportunities.
    Jun 10, 2015. 11:10 AM | 5 Likes Like |Link to Comment
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