Scott's Investments

Alternative ETF Portfolio Update

It's a formatting issue on SA - you can try looking at it on my blog, scottsinvestments.blog...

International Bond ETFs' Correlation to Equities

Hi, Good suggestion, I published an article similiar to the one you suggested: "Dollar Correlation to Global Bonds"

Alternatives to Buy and Hold for Income Investors

It's a fair question - volatility in bond investments tends to be lower then in equities. However, I would read Faber's paper for some results - bonds (10 yr govt) using a timing model had an annualized return of 9.11% vs 8.75% on buy and hold from 1973-2008. The key is that the volatility was 7.6% vs 9.05% on a buy and hold. He doesn't have corporate bond results, but I would suspect lower volatility there as well.

Alternatives to Buy and Hold (Part II)

Tom Lydon'ts ETF Trends website has a great (free) tool for tracking ETFs and the percentage they are above/below various moving averages. I have caught a few mistakes in their spreadsheet, so I would double check anything on the list.

Alternatives to Buy and Hold (Part II)

To answer your first question, Faber studied that and showed that there was no significant edge gained by shorting the market below the average. The returns earned on cash contributed to the lower risk/return ratio for the strategy. Regarding the band, yes, that would decrease toggles and transaction costs (and potentially taxes), and could also slightly decrease returns on the underlying investment.

Alternatives to Buy and Hold for Income Investors

Many finance professionals include TIPS as an 'alternative' investment along the lines of commodities, gold, absolute return funds, etc., since they tend to have a lower correlation to the rest of the bond market. TIPS have performed well recently and I think are a critical element to anyone's portfolio, high or low risk, to hedge against inflation and collect a little yield along the way.

Alternatives to Buy and Hold for Income Investors

Lightway: the commodities were included as diversifier - they often have very lower correlation to equity markets (in some case negative correlation). Obviously this portfolio took on a little more risk/desire for capital appreciation then a 90 year olds portfolio may take. I would suggest commodities to be at least at least a small portion of just about any portfolio, but obviously the total percentage could be adjusted based on risk tolerance/income needs.

Alternatives to Buy and Hold for Income Investors

Regarding the yields, they were all pulled either directly from the ETF provider website or in some cases yahoo finance. Obviously investors need to be aware of changing yields given the volatility of the market/dividend cuts as well as ex-dividend dates and frequency.

User329713: Your first question really is the crux of the issue - trying to time the market. I would pick a long term average and stick with it (100day+). For some performance data regarding the 100 day sma, see Merriman on fundadvice.com.

However, given the depth of the decline, for many indices there certainly is a lot of upside between here and the 200 day ema. I would highly suggest checking out Tom Lydon's site for one way to deal with this. A similiar strategy to Lydon's would be to do the following (which entails added transactions costs/potential tax implications/whipsaws/and some added risk to consider): Take 50% of what you would normally allocate to a position. When that equity crosses a shorter term MA (like the 65 day ema you mentioned, or more commonly the 50 day), use that as buy signal on the 50% allocation. If the equity crosses below the average again, sell. To avoid whipsaws, you could set a 1-5% buffer (you decide the exact #) on the average so the position would actually have to rise/fall 1-5% above/below the moving average before a buy/sell signal. Then, when the equity crosses the longer term average like the 200 day, buy with the other 50% you have allocated for that position. This would help 'catch' some of the upside when it happens while still limiting some of your risk.

Alternatives to Buy and Hold for Income Investors

I would use the daily function when using moving average strategies -

Alternatives to Buy and Hold (Part II)

Also, regarding your previous comment, I couldn't agree more! Putting a system together and having the discipline to follow it is the hard work, the buy/sell decisions come automatically which will allow you to take the remote and change the channel from CNBC. I've been playing around with some moving average ideas on the Forex market but have yet to come up with anything I feel comfortable with (mainly because I'm a novice at FX and need to work on position sizing/stop loss triggers). Eventually I'd like to clean up my blog and convert it to primarily tracking MA model portfolios like the ones I've written about, but I do have quite a few ETF charts on the right hand side if you need a quick reference for moving averages for a particular ETF.

Alternatives to Buy and Hold (Part II)

Hi - You could apply the system to individual baskets of stocks, I think the primary thesis holds true across the equity markets as a whole; however, be mindful that a diverse asset allocation across all sectors is key in order to capitalize on trends - a simple trend system like this only helps in maximizing alpha, diversification and low expenses do the bulk of the work. Regarding stop losses, you can play around with different models to see how it affects returns, but gauging the peak/trough points in any cycle is not always easy to do. However, you raise a valid point that Tom Lydon addresses on ETFtrends - I could be mistaken but I believe his original model was exclusively based on the 200 day MA as the buy/sell signal. However, given how far we have fallen in most markets and the distance below the 200 day MA, he now proposes entering a position in the following manner for people who are deep in the red and make look to capitalize a little quicker on trend reversals (I believe this switch is simply for today's market conditions and overall he still adheres to the 200 day ma strategy): * When a fund crosses above its 50-day moving average, put 25% of the value of your portfolio.
* When the fund goes up 5%, put another 25% in.

Ultimately, the goal is to catch a trend, stay disciplined to a system, and cut your losses to preserve capital.

As a final note, the guy who intially got me started on trend systems is Mebane Faber - his new book is now available on amazon, I haven't read it (it's enroute) but I am sure there is plenty in there for both of us to soak up.

Alternatives to Buy and Hold (Part II)

We can certainly debate the percentage which should be allocated to commodities, but the data goes back to 1974 so it is a fairly large sampling period. However, I would agree that it would be a bit risky to consolidate everything in a GSCI tracking ETF, hence my proposal to allocate the 'alternative' portion (also open for debate) in a larger portfolio among

4% GSCI – GSP (or substitute DBC as an ETF)

4% Element S&P CTI – LSC (or substitute RYMFX)

4% Precious Metals(gold and silver) – DBP

4% Current Harvest Fund – DBV

4% Agribusiness – MOO

One could also even substitute an absolute return fund or some other alternative asset.

Alternatives to Buy and Hold (Part II)

exbury2: Yes, I made the correction but apparently the article posted by Seeking alpha is still showing 300 day in a few areas - it should read '10 month sma'. Kinabalu: Read Faber's article, using the GSCI as a 20% allocation was the benchmark used which helped contribute to the risk adjusted returns. However, you could certainly adjust the percentage as you see fit. The goal is to get diversification across as many non-correlated assets as possible and there is an abundance of evidence that direct commodity exposure helps lower volatility and increase risk adjusted returns.

Alternatives to Buy and Hold (Part II)

Good question Schneidehouse - According to Faber going short historically does not improve the returns on the portfolio I think partly because historically the yield earned on cash helps contribute to positive returns (despite today's abysmal rates) and the margin costs of shorting an index would reduce overall returns. For a brief discussion, visit www.mebanefaber.com/20.../

Alternatives to Buy and Hold (Part II)

Correction: Please note that Faber's system uses the 10 month SMA, not 300 day, I made the update but apparently too late for Seeking Alpha to make the correction.