Tactical Allocations

The Origins of My System: This will likely be too in depth for many but I wanted to put my process out there for those who might be interested. So how did I create my system for taking risk.  It actually was an effort that progressed through about 10 years as I learned of new techniques and thought of new ways to implement the information.  Below is a high level overview of the process. I began by collecting many different economic indicators that I felt might give some indication of upcoming performance.  I found that many indicators had a cyclical nature to them and so I looked at these relative to the next year of returns on a bunch of different indices. If there was a strong correlation between the level of the economic indicator and the index return then I kept it as valuable information. I then studied the indicators that gave the strongest signals and noticed that some of the indices went up when the indicator went down and others moved the opposite direct...

We have seen historic moves in the markets this month. Volatility is back in spades. So how can we best weather the storm?  Is there a way we can benefit?  What should we learn for next time? These are the times when fortunes are made... and lost. Although we cannot change the past, where you started this downturn has a lot to do with what you are able to do now that we are in the middle of it. If your portfolio was 100% equity before the downturn: You are in a tough position. Nobody knows when this is going to turn.  It could start back up tomorrow or go down another 30%. What drives that is unknown (when will they have a vaccine, better treatments, better ways to stop the spread). Selling now is not prudent you are best off enduring the pain. What you can do is put new money into the markets. Look at what is down the most and try to increase the amounts you are putting into those investments. New money is your key to success and will be far more beneficial th...

Markets are down a huge amount in the past two weeks (about 20% for US Equities) - So what are we to do? S&P 500 recent price performance Lets look a bit at what drives short term movements in the markets and then we can figure out what to do. First of all: Fear and Greed drive market movements. When we are fearful of the future, prices go down and when we are greedy (or confident) they go up. Unfortunately following the herd is almost always the worst thing you can do. If you want to be successful you must lead the herd.   Secondly:  As much as they want you to believe the opposite, the news does not drive the market . The news reports what happened in the market. If markets are down, they do not focus on what went well that day, they focus on what might have caused the downturn. The opposite is true when markets go up.  The news causes up and down cycles to go farther than they otherwise would. Thirdly: When you are looking for returns in inve...

There are certain attributes that a person can develop to help them in any activity.  To use a sports analogy there are certain muscles or body systems that are key for certain sports. You don't need endurance for weightlifting and you don't need incredible power for long distance running. So what are the skills or attributes needed to be a good investor?  I will list a number of them and will try to talk about one each month going forward. In my opinion the following attributes are key to becoming a successful investor. Curiosity, Patience, Humility, Conviction, and Discipline Patience: Patience in investing is vital and also very difficult.  When things move both in good and bad directions it is very difficult to not react. Emotion is the enemy of patience. Knowing yourself and being in tune with your emotions is more important than any external stimulus or statistic.  Quantitative measures or hiring a professional is one way to take the emo...

There are certain attributes that a person can develop to help them succeed in any activity.  To use a sports analogy there are certain muscles or body systems that are key for certain sports. You don't need great endurance for weightlifting and you don't need incredible power for long distance running. So what are the skills or attributes needed to be a good investor?  I will list a number of them and will try to talk about one each month going forward. In my opinion the following attributes are key to becoming a successful investor. Curiosity, Patience, Humility, Conviction, and Discipline Curiosity: All great investors are curious by nature. They want to know how things work. They often enjoy puzzles and riddles. They love to learn about new companies and industries. They are also curious about what could go wrong and what could go right. They research and analyze and ponder upon their investments and the mentality of the markets. They are open to n...

Dollar cost averaging simply means that you buy the same dollar amount of a security at regular intervals. Example: You buy $1000 of Tesla stock every Friday for a year. Why do it?   This is easiest to highlight with a real life example. You buy $1000 of Tesla stock every Friday for 52 weeks. You start on January 5, 2018 when the price was 316.58 You end on January 4, 2019 when the price was 316.13 Was this a profitable investment strategy?   If you had bought on 1/5/18 and sold on 1/4/19 you would have had a small loss because the price was slightly lower.  However because of Dollar Cost Averaging we actually made $560 and had an internal rate of return (IRR) of 2.2%. How is this possible? By holding the dollar amount invested constant we bought more shares when the price was low and less shares when it was high. Example: On February 2nd, when the stock price was $343.75 we only bought 2.91 shares of stock but on October 12th, when the price was $258....

Retiring  is easy, its funding a decent lifestyle in retirement that is difficult. Everyone makes retirement planning way too difficult. It should be very simple. Let's see what we can do to simplify it in this blog. The ultimate goal is to have enough in savings to support you for the rest of your life.  Complexity comes because we try to factor in things we do not know and cannot control. Let's focus on the things we can control. For the uncertain aspects, I will share some rules of thumb that work pretty well. First of all, the only number that matters as you prepare for retirement is your Savings % . How much of your salary are you saving every year? In formula it would be: Savings / Income = Savings % Is it 5%, 10%, 15% or more?  This is all you need to worry about when thinking about retirement. I will get into why in a moment. Before I go there I want to look at a related question. How do you know when you have enough to retire? My rule of thumb is tha...

MICE (Money, Ideology, Compromise/Coercion, Ego/Extortion) - a CIA acronym that highlights the main motivations for a person becoming a spy.  It is crucial for the CIA to understand the motivations of those who give them information. It is just as crucial for investors to understand the motivations of those who say they want to give them money. When you look at an investment opportunity, if you do not understand how the money flows and the motivation of everyone involved then you should not invest. This is not to say that you have to talk to all the people involved but you must be able to understand the structure and see why each person is willing to play their part. If you cannot see this then you should not invest. Lets go through a couple of generic examples: A public company ~ A public company has many stakeholders (people who are interested in how it runs its business). It is important to understand each and how they might influence the course of the company. It is ...

My lawn is a mess.  You might wonder what that has to do with investing, the answer is nothing, but this weekend I went online to find out how to improve my lawn and found "the Lawn Care Nut" on U-Tube. As I watched his podcasts I realized how something he knew so much about could be very confusing to a beginner.  So I am revisiting the basics today. The Three Keys:   I am going to focus on the three most basic things needed to begin investing. They are Material, Time, & Patience. Material:   Every craftsperson has material they work with or a medium.  The material for investing is cash. Without cash you cannot invest. I define investing as: using your cash to earn more cash.  You can think of each dollar as a little worker that works for you 24/7. Without material (or workers) you cannot build anything. So the first thing you need to do to become an investor is put some cash aside.  This is easiest through a retirement plan, especial...

"Mistakes are the portals of discovery" ~ James Joyce I decided to do two insight posts this month as I have missed a couple of the past months. In statistics there is a test for hypothesis which looks at the hypothesis prediction and the actual outcomes over many experiences.  The less errors the more robust the hypothesis. I decided to do this for my model going back as far as I could. I was curious about my ability to protect in down markets and yet still take advantage of up markets. For my review I called any year where fixed income did the best as a down market and all other years up markets. In alignment with this I looked at my calls and if I had called for a fixed income investment then that was a defensive portfolio, all others were aggressive portfolios. The results are: Total periods: 359 Analysis:  These results show what I expected.  I am capturing 96% of the strong markets (259 of the 271 strong market periods) while still avoiding 27% o...

“Great works are performed not by strength but by perseverance" ~ Samuel Johnson   Patience and perseverance seem to be increasingly scarce and disregarded today.  Technology has given us quick access to ease and comfort; often at the touch of a button.  We get irritated when it takes 5 seconds for a screen to load or if we have to wait in line or for a package to be delivered.  In contrast, I recently had a wonderful meal at a French restaurant that was all about waiting. The waiter took time to explain the preparation of each course in detail. They described the processes the chef went through to develop the unique textures and flavors. Many of the servings were barely a mouthful but the chef and his team had taken weeks to prepare them. They were able to get textures and flavors out of ingredients that I would not have thought possible. Every step was timed precisely, too early or late and the result would not have been pleasing. When done c...

"That which gets measured gets improved" ~ Thomas S Monson Last month I posted on some good calls I had made and I wanted to offset that this month with something I have learned (read between the lines - a poor call) as I have been running this blog. Lesson: Sizing of exposures is critical. When starting the blog, I sought to make it simple and just made two bets in the enhanced portfolio. I replaced small cap equity with emerging market equity and large cap equity with international equity. Normally the portfolio would have a more diverse set of ideas but for simplicities sake I only started with two. As you can see below, the international equity (DSEUX) has not performed well and has been a large drag on this portfolio. I expect this will be reduced over time but it creates a tough start for the "enhanced" portfolio. The way to read this chart is; each color is one of the investment options I have talked about in my blog. The return percentage is listed ...

"I'd rather be lucky than good" ~ Lefty Gomez In the case of my post, on December 15th, about Bitcoin , and my post on February 9th, about Volatility , I would like to think I benefited from a little of both. Bitcoin: When I wrote the post, I did not know that regulators would come out to stop speculative trading (bought on borrowed money) or that it would hit its peak just two trading days later. But I did know a couple of things. I knew that it was a bubble, that many people who had no idea what it was were speculating in it and that eventually it would drop severely. Below is the last 6 months of Bitcoins price movement. The blue line is when I posted my warning. It could bounce back up again but given the combined Government and bank actions against crypto currencies I think it is unlikely. For additional context, bitcoin traded at five cents per coin in 2010, it is conceivable that it could go back to that price. Volatility: This month we got a taste ...