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Henry L. Becker, Jr.
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Henry L. Becker, Jr., CFP® is the editor of Market&Economy blog which takes a panoramic perspectives on capital markets, economics, financial planning & mores. Mr. Becker is a partner and director of research and investment strategy with Lighthouse Wealth Management, an investment... More
My company:
Lighthouse Wealth Management
My blog:
@ the Corner of Market $ Economy
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  • Mitigating liar's risk with ETFs
    From the time we learn to speak we are taught to tell the truth. The problem these days is that many companies (and countries) do not want to face and in many cases tell the truth. Why on earth would companies and governments want to be less than forthright?  The answer is simply self-preservation. Investing is hard enough and it gets infinitely harder when dealing in half-truths and lies.


    A few weeks back the Financial Times newspaper was reporting that the Chinese were reconsidering the Euro and European bonds as part of their long-term investment strategy. This “rumor” was quickly dismissed by the Chinese government. There is no way that the Chinese government would do anything other than dismiss this report. If the Chinese government were to admit they were reconsidering their investments (or future investments) their current European bond and currency holdings would lose value as everyone would rush to the exit. In a few months we can look at the numbers and will know the truth about China’s investment practices.

    How do we know an exodus would happen if China were to say they were going to reconsider their investment in Europe? In addition, a few weeks back the vice president of Hungary’s ruling party said that Hungary would be lucky to avoid a a Greek-style crisis.  This admission of truth (which the vice president tried to backtrack on) sent shock waves around the globe and took markets for a steep drop. Keep in mind we are talking about Hungary not China.

    So, companies and governments face a conflict of interests of either being forthright with the truth and living with the consequences or hiding until the last minute. Waiting until the last minute seems to not work out for investors. Lets look at some of the lies we have been told and how has it affected the markets:

    • Bear Stearns and Lehman Brothers denied problems right up to the time they imploded
    • Alan Greenspan (former Fed chief) repeatedly claimed there was no problem in the housing markets.
    • Countless U.S. government officials on a regular basis. How many Senators denied there were problems with Fannie Mae and Freddie Mac.
    • The Greek government for the last 10 years (or more) in regard to their debt situation.
    • Enron – almost the entire time they were in business.
    • Toyota – problems with cars were kept hush hush.
    • BP – initial reports were that the leak was not serious or a threat to the coast.

    Planning to be lied to

    When building a portfolio we are told to diversify to minimize risks. The risks usually referenced are interest rate, currency, political, and single security to name a few. I believe we need to add liars risk. Consider how much damage is caused when lies are found out. So how do you plan for lies? The first step is to use ETFs. ETFs give exposure to a broad basket of companies versus buying one company. You could buy BHP Billiton mining companies stock or your could buy a mining ETF. With a materials ETF you get exposure to the industry you want without the risk of owning one company.  Sure mutual funds and ETFs are both diversified but ETF trump mutual funds in that each day you know what you are holding, they are cheaper, and you can trade throughout the day which gives you more control of entry and exit points.

    The second step is having a plan to limit your losses.  I use the 50 and 200 day exponential moving average as points to look at holdings or in the case of the 200 day moving average as a point to trim holdings.  Additionally, trailing stop losses are a good way to limit losses if you are not going to stay on top of your investments. With ETFs trailing stop losses are possible.  With conventional mutual funds trailing stop losses are not possible.

    Bottom line

    In today’s world information travels so fast that an offhand comment across the world can rattle global markets. Living in this reality is causing companies, governments and people to be less than truthful.  But, when the truth comes out the markets are not very kind.  So, when you are considering your investments you must look through what is said and many times and look at actions or numbers.

    Disclosure: No positions
    Jun 25 12:05 AM | Link | Comment!
  • ETF Sortino Ratios and More


    When you plow the internet for ETF Sortino Ratios you find very little (almost nothing).  If the market crisis we are still living through should have taught advisors anything it should be to take a fresh look at your approach.  I have done just that and started with how I look at risk.  


    Instead of placing so much emphasis on standard deviation, as most of us have been conditioned to use, I have moved to the Sortino Ratio and downside risk.  In case you are not familiar with the Sortino Ratio it is more or less the Sharpe Ratio except you replace the standard deviation in the formula with downside risk.  The larger the Sortino Ratio the better. So, the Sortino formula looks like this:


    Sortino = (Return - Target Return) / Downside Risk


    For my calculations the Return is the average return over the last 36 months (where available).  The target monthly return is .48667% (approx. 5.84% annual).  Downside risk is a more complicated calculation but here it is.  First, we identify those returns which are less than the target return each month.  Second,  square those returns that are less than target returns for each month.  Third, calculate the sum of the squared returns from step two.  Fourth, divide that sum by the total number of months.  Last, we find the square root of that number (then multiply it by 100 to get a percentage).


    My goal was not to pick apart every ETF available in the US, but to look at countries, global sectors, and some US sectors.  Statistics I calculated for each fund are based on 36 months where available.  Statistics compiled  are:

    • Annual Sortino Ratio at 5.84% Target Return
    • Correlation to ticker ACWI (iShares All World Equity Index)
    • Annual Standard Deviation 
    • Annual Downside risk at 5.84% target Return
    • Mean Monthly Return
    • Volatility Skewness (more or less the ratio of months above target to months below target)  Higher the number the better.
    • Cumulative Return for Period 
    Below is an image / link to the PDF results.

    Jan 11 3:46 PM | Link | 4 Comments
  • Can you profit from Clean?

    Businesses worldwide are salivating at the promises governments are making in order to clean the world in which we live. According to an article titled “Europe moves to reduce pollutants,” by Joshua Chaffin of the Financial Times, environment ministers across Europe have agreed to sweeping plans and new investments to reduce sulfur dioxide and other pollutants that industries pump into the air. This is just one example of how governments and businesses are looking to be more proactive in taking care of the planet. How can you profit from the effort to clean?

    Clean Technology

    PowerShares Cleantech ETF (ticker PZD) is just the fund to get exposure to the highly innovative cleantech companies that will be helping keep our world clean. The Cleantech fund tracks a global index of stocks from businesses that provide products and services designed to prevent pollution and hazardous waste. According to PowerShares literature regarding the fund, to be considered cleantech products and services must:

    • Optimize use of natural resources, offering a cleaner or less wasteful alternative to traditional products and services
    • Have their genesis in an innovative or novel technology or application
    • Add economic value compared to traditional alternatives

    More than half of the portfolio is invested in U.S. companies and the remainder is spread across the world. The fund is up 13.82% YTD, and up 21.10% in the last three months. Currently, the fund is above both its 50 and 200 day EMA.

    Disclosure Statement: ETFGPS is a blog that Navigates The World of ETFs. Sustainable Investment Strategies LLC is a Registered Investment Adviser in the State of Maryland, and may hold positions in the ETF(s) listed above. Investors who are interested in money management services may visit the Sustainable Investment Strategies LLC web site.

    Tags: PZD
    Jun 29 9:06 AM | Link | Comment!
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