Jeff Diercks'  Instablog

A recent survey by Both Sides Now of 75 families with at least $30 million in assets and a Institute for Private Investors membership showed that such investors are now much less inclined to give up control over their portfolios to an adviser.

Of course, why would they after the showing by hedge funds and advisors in 2007-2008 and by hedge funds post 2009?

The survey found that only 32% of families with up to $50 million in assets felt comfortable giving their advisors complete discretionary control over their portfolios. This number declined to just 20% for families with more than $200 million in assets.

Now these are the super-wealthy in the U.S. so it is not surprising that 61% have an in-house chief investment officer.

My take on this is that advisors disappointed in 2007-2009. The super-wealthy are dubious that they have learned their lesson and that the same thing won't happen in the next major bear market sell off.

Now as a former family office CEO, I am dubious that a in-house chief investment officer is the answer. The answer is probably much simpler such as diversifying to more than one advisor. I would also suggest that buy and sell signals, like those trend following signals we provide at Stock-Signal.com might be the answer.

So you are probably asking why on earth is Stock-Signal.com the answer Jeff? Also why on earth does Stock-Signal.com seem to be the answer to everything for you short of a cure for the common cold?

The answer is simple!

Since the wealthy primarily invest in individual stocks and some managed accounts, the solution is to hedge this exposure at the proper time to preserve capital.

With the wealthy, taxes are everything! They don't want another 2007-2009, but at the same time they don't want to sell their favorite stocks. So they have a problem.

My solution: sell some of the prized stocks now and set yourself up to add a trend following hedge using Stock-Signal.com.

What is this? It is using some of the proceeds to buy one or two Stock-Signal.com index signals that will hopefully make you money in the bull market and flip inverse or short in a bear market, thereby, hedging the remaining positions held in the portfolio.

Here is an example:

Let's say the wealthy investor has a single portfolio and no other managers (not likely, but we need to keep things simple). Let's further say his portfolio is $1,000,000 in individual stocks.

For this solution he would sell some of his stock positions. Let's assume he sells those with the lowest tax hit (or with tax losses if possible). He raises 40% cash or $400,000.

He now buys a 50% S&P 500 position ($400,000 x 50%) and a 50% Nasdaq position ($400,000 x 50%) utilizing broad based ETFs and our Stock-Signal.com signals.

Based on our signals today, he will be long both positions and they will hopefully provide broadly diversified gains for the wealthy individual and his/her portfolio as a whole on a pretty tax efficient basis.

When he/she gets sell signals on one or both of these Stock-Signal.com signal positions, they will now have a 60% long portfolio of individual stocks and a 40% short or inverse positions in the two Stock-Signal.com positions. So in theory, they are only 20% exposed to significant market declines (60% long - 40% stock-signal.com inverse/shorts).

Let's also assume his portfolio of stocks are primarily value stocks with low betas (see more on beta here). Let's assume the portfolio beta is .80.

Let's also assume that the S&P 500 component of the hedge has a beta of 1.0 and the Nasdaq Composite component a beta of 1.01 today. This would mean on a beta basis that the hedge would actually cover 83.7% of the long stock portfolio risk ($600,000 x .80% / (($400,000 x 50% x 1.0%)+($400,000 x 50% x 1.01%))).

So bottom line the wealthy guy gets to have his cake and also eat it!

1. He/she maintains control over his portfolio.
2. He/she gets to keep most of his individual stock portfolio.
3. He/she gets upside from the 40% trend following portion of his portfolio using the Stock-Signal.com signals.
4. Finally, he/she gets protection for his portfolio by following the Stock-Signals.com signals that limits the downside of his tax efficient buy and hold portfolio of individual stocks.

Want to know the best part? You can do this too, whether you have a portfolio of $10,000 or $10 million.

It only cost a little time and an inexpensive subscription to Stock-Signal.com!

Why not get a free trial today?

There was an old song by Carly Simon that has been around since the 1980s called Anticipation. I could hum it for you, but that would not be a fun experience for you.

You may also remember the song from the Heinz Ketchup commercial that used the theme song.

Click to play video

What does this have to do with Stock-Signal.com or managing money?

Well simple!

Sometimes it is so tough to wait for the trend following signal, that we anticipate the end! It seems the more technical analysis skills we have, the easier it is to fall into this trap.

Yet the minute we make this call, the market we are watching moves higher and then we are left with even a worse feeling called "Missed Opportunity."

You see the simple truth is that no one knows when a market will top or even where it will correct. Yes, it is obvious sometimes in hindsight, but it is often very tough to call on a real-time basis.

Maybe you have watched CNBC's Fast Money and saw Dennis Gartman comment on how he was exiting stocks. Well he made that comment in February and has now missed two pretty good months of returns as a result. Tops are very tough to call!

That is where trend followers (and Stock-Signal.com) have the edge, we don't try to predict. Instead we react!

We attempt to capture the middle of the move. Content to not be the first in a new trend or move and to give back a bit of the top of the move to stay with the investment as long as possible.

As with all strategies, it does not work all the time. However, recently I have seen so many technical reasons to jump ship on this market but yet it continues higher. This is truly a trend follower's market (in the U.S. equity markets only), one that fools the masses and keeps heading higher.

So did you get fooled into getting out of this market early? If not, why have you held on?

Over the weekend, I was reading a piece in the S&A Digest via The Daily Crux (a daily article summary). They claim to have compiled the world's largest stock pile of past market data (my exaggeration) and then fed it through some kind of supercomputer to answer the holy grail of investing questions. Sounds a little too much like Wizard of Oz meets Mr. Wizard to me!!

Through this research they answer the "4 biggest questions in investing." Although I am not sure that you can limit the questions in investing to just four, I did find at least some for their analysis to be right on the mark, especially about trend following……….

Surprisingly, they showed that stocks do better in a bad economy that a good economy. They state the reason for this could be the fact that the market discounts the strength of an economy in the pricing of stocks. In essence, by the time things are great, stocks are too expensive (and now due for a fall). The inverse is true in a bad economy. Another possible answer could be that our government (of recent) has applied more stimulus to the markets in a bad economy forcing stocks to do better than they might do otherwise.

Whatever the reason, they made the case that when GDP (Gross Domestic Product) is below 0%, stocks have historically returned 18.5% over the succeeding year. Alternatively, when GDP is great than 6%, stocks historically returned just 4.2% over the next year. In general, when GDP is higher, the economy is stronger.

Here they stated that on an absolute basis the current stock markets are fairly valued at around 17 (price-to-earnings or P/E). The historical average P/E for the stock markets is 17.8.

I would make the case that no secular bear market has ever ended with stocks having a double digit price-to-earnings multiple, but I digress!

They then pulled out this nifty chart that shows that the higher the short-term interest rate, the lower this moves the market's opinion of whether markets are fairly valued. Inversely, they state a very low interest rate environment (like today) justifies a higher P/E.

(click to enlarge)

S&A makes the case that buying after a stock market hits its 52-week high has a compound rate of return of over 9.6% in the next twelve months. This is higher than the long-term "buy and hold" average return of just 5.6% a year. It is much higher than buying at the lows, which produced just a 6% return. These conclusions were based on 1950 to 2012 market data.

So in summary: "don't attempt to catch a falling knife (or market)" and "when markets hit new highs, don't sell, but buy."

How about this for a set up? I couldn't have arranged for a better question!

The answer (drum roll please)?

Trend following does beat buy and hold averaging 8.4% vs. just 6.6% for buy and hold over the same 40 year period.

Their system used a simple 10 month moving average of market price and in Bear Markets moved to 90-day treasuries. I am assuming their buy and sell signals came from price moving up or down through the moving average.

Beyond the returns, which really only benefited by being out of Bear Markets, the account value differences are quite stark. An initial $10,000 investment became $250,000 using trend following over the 40 year period. While the same $10,000 only became $128,000 using buy and hold. What a difference!

Imaging what would have been the disparity had they actually invested inverse or short in the Bear periods!

So in conclusion, markets act differently than most of us would guess. They seem to rise more in bad economies. They appear cheaper when rates are lower. They (stocks) only feel dangerous at new highs. In fact, those that buy at highs do much better historically, than those who attempt to buy lows.

Finally, and most importantly, trend following works! Which is yet another reason to give us a free test drive for 30 days!