Several requests came in for stock analysis. Read on to see if and when you should be placing a buy order and where to set your risk.
Citigroup (C) has made a big move from last August, almost doubling in value. The range for the past four years has been from under $10 to over $55 and is currently trading around $42.
You can see from the daily chart (above) that we are running into resistance established from the high made in July, 2011. You will also see where we broke above the high made in March, 2012 and October, 2012. Please also note the Mendoza Line (this is what I call our strongest level of support) - the upwards sloping trend line - is about to cross the highs made in 2012. This area should provide significant support.
Ideally, if price trades down into this support area and bounces, it could prove to be a profitable trade. However, even if it doesn't trade down into this area, and breaks $43.50 to the upside, there is probably still room to go higher. You should be willing to set your risk below the Mendoza Line (trend line).
Ford has had a 50% increase in 5 months. Maybe you should have brought this to my attention last summer! I actually have been watching Ford as well. So far, these are some good picks. I'm getting interested in Ford. This is the kind of set up where you could just put a buy order in at $13.50, which has double support. Unfortunately, the "Mendoza Line" is currently around $10. If it breaks above the high made in April, 2010 it certainly should go higher with the next stop at around $17.40.
General Motors (GM)
Buy it at $28 and set your risk at $25. Or take half off at $32, whichever happens first. Not a great risk/reward, but I can't get enough price history.
I called a buy on CAT last September and we're up about 18%. I still like it. We eclipsed and closed above the highs made in 2007 and 2008. Ride it and add to positions with bounces off $88. The "Mendoza Line" is the 200 week moving average (yellow line).
Bank of America (BAC)
I would be a buyer at $10.00. The "Mendoza Line" is the 200 day moving average (not weekly). Again, there is double support around $10.00. I would look for a good bounce off the March, 2012 highs and be a buyer. It's really not a bad buy where it's at right now, but you are risking another $2.00, which is significant at this price.
I hope these are helpful, and as always, if you have any stocks you'd like me to review, just go to the CONTACT PAGE and shoot me an email.
One of our SCT Members emailed me on Sunday asking for my thoughts on HPQ (Hewlett Packard) thinking it might be a good buy opportunity. Turns out, I was also looking at HPQ last week. I like it too.
Looking at the above chart, the lower, upwards sloping trend line is a monthly trend line. That trend line and the 200 day moving average (yellow line) will provide considerable resistance. If price can eclipse and move above these resistance areas, then price should go higher.
A quick trade would be to buy now and take profits at the resistance area. I would probably opt for a longer time horizon. The high price on Friday tagged the low made in August, 2004 and then traded lower from there in to the close. If we can close above 16.80 then break above the two big resistance areas, our next level to watch is just below 22.50.
Hope that helps.
“[Warren Buffet] sticks to his rules, and never strays”. -Liz Clayman -Fox Business
I’m sure you’ve heard me talk about the need to have a framework of rules to follow. It’s just nice to be backed up by the greatest investor of our generation.
This is one of the biggest mistakes average investors make. They have no rules.
Without rules, individual investors are heavily influenced by emotion when making investment decisions. For the hundredth time: emotion is kryptonite for investors.
How do you know what stock to buy? Do you listen entirely to your advisor? Do you follow the latest pundit’s “top stock picks”? And if so, how do you know you’re buying at a good price?
Do you have a price target in mind? And if so, what happens if you hit that price, and the stock just keeps going higher?
Most importantly, what if the stock starts to fall? When are you going to get out?
Without rules, investors are like a captain without a compass. There’s no direction. You have no GPS. You're staring at a sky with no stars. And somehow you're trying to sail in the right direction.
With a proven set of rules, you can eliminate, or at least minimize the damaging effect emotion has on your decision making.
When we purchase a stock, we have rules in place, so every move is decided ahead of time. We know the scenarios that will cause us to sell to avoid further losses if the stock begins to fall. We know when to let the market “breathe” and hold on through periods of minor corrections. And we know what will cause us to sell to capture profits.
We have no questions. We have rules, we stick to them, and we never stray. It works for Warren Buffet, it works for us, it’ll work for you too.
If you haven’t yet, you can check out the new investor training to see the rules that we’ve used to beat the market by 57% the last five years.
Alternatives to Buy & Hold
In the final post of this series, we need to examine what alternatives there are to following the ubiquitous non-strategy of buy & hold. In order to do that, I think we need to first identify the biggest weaknesses of buy and hold.
Buy & Hold's Biggest Weakness
As we’ve discussed, I believe the most important factor in any investment strategy is protection. I’m not the only one who holds this to be true. You should also remember from the first two posts, that the most striking weakness of buy & hold is a severe lack of risk management.
Buy & hold relies on diversification and periodic sector rotation to mitigate the risk of bear markets. Yet, these practices provide little protection from significant bear markets where virtually all equity classes will fall. Again, I’m not arguing against these practices, as I believe they have value. However, I AM saying they are largely insufficient as a form of protection.
So... our number one priority as investors should be protection. The number one weakness of buy & hold is a lack of protection. Therefore, that’s exactly where we’ll look to improve with our alternative strategy.
What can we do to better protect against heavy losses and significant bear markets?
Aside from a few options strategies, SELLING is the only way to protect against these types of losses. Another problem, however, is the lack of discussion regarding selling. (This can obviously be attributed to the industries love affair with buying and holding).
What solutions do we have that help us to know when to sell?
One of the simplest, and most used strategies is the stop-loss. If you don’t know, a stop-loss is simply selling after a pre-set percentage loss. So, if your stock drops 8% (ex.) from your purchase price, you sell, not matter what. Thereby limiting your losses.
A trailing stop is used to capture profits. You just keep moving your stop higher so it’s always, 15% (ex.) below price. So, if you’ve gained 50%, then the stock drops 15% from that high, you’re out with a nice 35% gain. This is preferable to a “target price” as you’re allowing yourself to ride out your profits, but protecting yourself from heavy losses. However, the a trailing stop is very rigid and doesn't take market activity into account, so you will often still miss out on potential profits (see chart below). Still, it allows the market some room to breathe, where choosing a "target price" allows for none.
For example, how great would you have felt 7 years ago if your broker had you buy Apple at 160, with a target price of 192 in 18 months. You hit 192 and sell for a fantastic 60% gain... only to watch Apple go up another 220% the next three years!
I’m not a huge fan of a stop-loss or trailing stops. They’re very limiting, and don’t take other market activity and indicators into account. They’re a simple, and basic way to limit losses. However, I feel like using a stop-loss is leaps and bounds better than having ZERO strategy for protecting against heavy losses.
Stop Loss on Steroids
What I prefer, and what we use at Smart Chart Trading, is like a stop-loss on steroids. It is based more on what we’ll call “price events” relative to our “framework” around price. We don’t pick a predetermined price point or percentage loss to sell at. Our sell strategy is dynamic and adjusts as the market changes. We don’t pick a point, or know exactly at what price we will sell, but, we know the exact events that will trigger a sell.
These events occur around critical price areas. Yes! There are critical price areas. Only a short time reviewing price activity around these areas will convince you of this fact.
So, we use these indicators and price areas to pre-determine the parameters that tell us when risk is too high and selling is appropriate. Which allows us to let the market breathe, but also keep losses at an absolute minimum.
For example, our SCT Model, trading off of the SPY (S&P 500 ETF) and has averaged only 5% losses on these types of loss minimizing trades. (The model averages 47% gains on correct trades by the way). So we average a far lower loss than a standard 8% - 12% stop loss.
Buying & Holding might be OK for a pension fund or endowment as they run in perpetuity. However, an individual doesn’t have this luxury. An individual has an “investment horizon” to deal with. We can’t afford to get stuck in a 17 year secular bear market. We can’t afford to buy and HOPE that our retirement is timed perfectly with a bull market. The math just won’t work out, especially as one gets closer to their “investment horizon”.
So... is there an alternative to buying and holding?
Obviously, I think so. And I believe the alternative can actually significantly outperform the market. And outperform the market with significantly less risk. (check our performance history here).
What do you think?
I don't like JACK for a few reasons.
1. Price was essentially range bound and sideways for 2009, 2010, and 2011.
In fact, price was so confined by this range, and traded so flat through this period, that the three moving averages displayed (20w, 50w, 80w) were right on top of one another for about two years.
2. JACK has had a nice run up for 2012, however, price is nowhere near a good support level.
You're a long way from where we would like to set our risk. Remember, our primary focus needs to be managing risk and purchasing this stock means you're risking at least 12% - 15%. I'd rather purchase at a point where I can apply an exit strategy with less risk.
3. Finally, JACK hasn't provided any more gain vs the S&P 500 since the low in 2009.
Why own JACK when you could own 500 companies that are performing just as well? Owning 500 companies carries less risk than owning 1 that hasn't performed any better than the composite of 500.
This doesn't mean it won't go higher from here. However, I wouldn't be a buyer at these levels. I do like their commercials though.
If you have a chart or a company you'd like reviewed, just shoot me an email or use the contact page on the site.
Why Buy & Hold Became so Prevalent
So we left off concluding that buy and hold is NOT the strategy with the least risk and most long term profitability as Wall Street would love us to believe (and spends billions in advertising to convince us). Personally, I don’t think buy and hold is even a strategy. If you haven’t read the first post in this series you can find it here.
Moving on... we now have to examine WHY buy and hold has become so prevalent.
As defined benefit plans (pensions) gave way to defined contribution plans around the 1970’s, employees were almost forced into the stock market to fund their retirement years. More and more people were in charge of investing and growing their savings to fund retirement.
Around this same time buy and hold was being promoted as a safe and prudent investment strategy for the average investor merely looking for sustained conservative gains. Buy and hold goes right in line with middle class American values of optimism, practicality, and natural aversion to risk.
It was anathema to the over leveraged get rich quick thinking that had caused the crash of ’29 and made millions of Americans wary of the market.
Right when buy and hold was gaining momentum as a “safe and effective long term strategy” during the late 70’s and early 80’s, stock valuations were at extreme lows. So you had an entire generation, and an entire country, “buying and forgetting”. Fast forward 15 - 20 years, and the same investors have experienced safe, sustained growth.
Then the shit hit the fan. It had been a very long time since a major correction and many investors had never experienced one in their investment lifetime until 2001. Then it happened again a few years later in 2008. Pensions are now upside down, and middle class America has been taken to the cleaners.
Looking back it’s clear that the growth from ’83 - ’01 had zero to do with the strategy of buy and hold and more to do with valuations. But don’t tell that to buy and hold advocates who had built their retirement’s on the strategy. Predictably, buy and hold received the credit, and ever since it has been embedded in the industry, as well as in the average investors mind.
Add that to the fact that most individual investors who attempt to beat the market fair extremely poorly in their attempts, due in large part because they try to “time” the market with no clear plan, or rules-based strategy. Instead, these attempts are pure guesswork, and more often than not, dictated by emotion.
With no real expertise, and with no real strategy to make these types of decisions why would so many people try to “outsmart” the market? I’d say it’s because they weren’t content to sit through the heavy losses you’re required to sit through if you are truly buying and HOLDING. But again, with a lack of proven strategies to follow, attempting to time the market is a recipe for disaster.
What’s good for the goose not so good for the gander
The final reason why buy and hold has become so prevalent? Money.
Not money for you and me, since I believe we can do much better than buy and hold. But profits for the big brokerage houses.
Buy and hold is a self serving model for brokerages.
Most advisors are trained to follow Modern Portfolio Theory (MPT). MPT is essentially buy and hold using diversification and periodic sector rotation to try and mitigate the risk of never selling. This strategy is based on the belief that regardless of valuations, stocks are always a good investment. Were stocks a good investment in 2000/2001? Were stocks a good investment in 2008? NO! Yet, the stock selling industry would have nothing to sell when valuations or risk is too high, so it’s very convenient that their default strategy keeps you invested in equities at all times, regardless of valuations or risk.
So buy and hold fits PERFECTLY with the big brokerages goals. It seems like a safe strategy to investors due to it’s simplicity and conservative long term focus. It keeps you in the market, and keeps you buying.
The problem is it only takes a quick analysis of this strategy to see that it’s a weak strategy at best (and I actually don’t even consider it a strategy). “Buy and do nothing” is not much of a strategy as far as I’m concerned. You’re basically accepting 50% and higher potential losses, and simply HOPING that your retirement doesn’t come around during a bear cycle.
But most importantly, it’s greatest weakness lies in what should be an investors greatest focus: risk management.
Most advisors attempt to mitigate the risk of buy and hold by diversifying and periodically rebalancing our assets. As we discussed in the previous post, these practices are completely insufficient forms of protection.
So, reviewing our original questions. I believe buy and hold is not a strategy with limited risk as Wall Street would love us to believe. I also believe we can significantly improve upon buy and hold’s long term profitability (I’ll tell you why in the next post).
We’ve identified at least a few of the factors that have made buy and hold so prevalent... faulty theories, misplaced credit for profits, and because it serves brokerages bottom line.
Now we need to find out what alternatives there are. Watch for the next post... Alternatives to Buy & Hold.
*This is not meant to be a comprehensive analysis on the contributing factors to the rise of buy and hold as a dominating long term investment strategy; but an overview on what I see as the rise and fall (in my opinion) of buy and hold as a legitmate strategy.
Buy and Hold... Buy and Hold... Buy and Hold... Buy and Hold...
A pattern that has repeated itself millions of times for millions of investors for decades. But why?
Is this really the strategy with the least risk, and most long term profitability as Wall Street would have us believe?
Today, I want to examine this question. And if the answer is no, then why has it become so prevalent? And what are the alternatives?
For the purposes of this post, we’ll define “buy and hold” not as the general use of buying and holding any equity, fund, etc. But specifically as Wall Street’s use of buy and hold to buy a diversified portfolio of equities, bonds, mutual funds, etc and hold on for an indefinite amount of time... or forever.
The average individual investor relies heavily on his money manager for his or her investment decisions. After all, the average investor doesn’t have 40+ hours a week to devote to educating themselves on investing strategies, and analyzing stocks.
So we rely on our advisors. We trust (to some extent) the big brokerage houses the most as they’ve been around forever and have the most capital to invest in research and talent (as well as advertising), so we go with one of them.
Buy & Hold, Diversify, Rotate Sectors
Our money manager advises us on a buy and hold investment plan that incorporates a diversified portfolio with periods of sector rotation and asset allocation in order to manage risk.
But buy and hold means exactly that. We are buying, then holding on through every market cycle, good or bad, bull or bear. We’re simply buying a ticket for the roller coaster.
But we don’t want to hold on through severe bear markets. We want protection. So, like our broker advised, we diversify, we rotate sectors, and use asset allocation to manage or minimize the risk of bear markets.
But does this really protect us?
During severe, or prolonged bear markets, won’t virtually all stocks, and all sectors fall? Honestly, are we to believe that simply because we own a variety of companies that we’re somehow protected from bear markets?
How did that work out the last twelve years?
Diversification is not a complete form of protection.
If the big brokerage houses - who have so much money, and so many resources - if they truly “have the experience to guide you to retirement”, then why is it that the average investor fails miserably to even match the market? From ’88 - ’08 the average investors annual returns were 1/4 that of the market! Granted, the individual investor takes some responsibility. But that’s what we pay our advisors for.
No other industry gets paid billions of dollars, for such a mediocre-poor product.
The average investor would be FAR BETTOR OFF by simply saving all the money they spend on advisor fees, and mutual fund loads and fees, and simply put their money into the S&P 500, or any other index. According to the statistics, they’d be making far more than they have been, and spending exponentially less on fees.
Diversification’s Failure to Protect
I have a number of friends who have MULTIPLE money managers working for them. Independently of each other. They all followed the same general buy and hold plus diversification strategy. One of my friends was on track to retire around 2002. Well, as you know, the market dropped 50%. Did his high-priced money managers and well diversified portfolio protect him from that 50% bear market? Not at all. He was forced to put off retirement for another 5 years. Instead of rolling out of bed at 8:30 for a tee time, he spent 5 more years waking up to an alarm at 5:00 in the morning to go to work.
Or another friend who again, had FIVE independent money managers. Each created a well diversified portfolio. How did that help him in 2008? He lost over 45% of his portfolio’s value.
In my humble opinion, diversification, along with sector rotation and asset allocation, are not effective, or complete forms of protection. We absolutely need another way to protect ourselves from significant bear markets and heavy losses.
If you weren’t already convinced of this through the experiences of your friends, the experiences of my friends I just shared, or the logical conclusion that the majority of stocks fall in bear markets, then look to your own experience and tell me if these tools have helped you to avoid the heavy losses experienced by so many in the early 2000’s and 2008.
I could go into more detail as to exactly why diversification, et al, are not complete forms of protection and their association (or origination) with Modern Portfolio Theory. But that can get technical, and I’d just be expanding the on premises I already made, and I’d like to move on as I’m sure you would.
So... my conclusion is that diversification is not a complete form of protection.
Since diversification is the primary risk management tool for the brokerages who preach buy and hold, then I have to conclude that buy and hold is not a risk averse strategy. In fact, we are left risking 50% or more of our portfolios value with no other form of protection.
In addition, individual investors poor performance history - failing to even come close to matching the market - leads me to believe that there’s much more room for long-term profitability.
Therefore, to answer our original question... in my opinion, Wall Street’s version of buy and hold is not the strategy with the least risk and most long term profitability. At the very least, it does not provide sufficient protection from bear markets.
Since the answer is no... we now have to examine WHY it has become so prevalent.
It’s partly due to market activity that reinforced the strategy for an extended period of time, and partly due to big business and corporate greed.
Now, I hate to vilify big business as I’m a free market capitalist, but in this case, the answers lead to a pretty logical conclusion.
Look out for the next post in a few days...
Buy & Hold Subjects You to 50% and Higher Losses
You only need to look back as far as 2008 or 2001 to realize that the ubiquitous B&H (buy and hold) investment strategy can subject you to losing 50% or more of your portfolio of equities and bonds. Of course, to mitigate some of that risk of B&H, diversification is certainly the “go-to” strategy. If you diversify with bonds, the expectation is that as equities fall there will be more demand for bonds and that bond prices will indeed rise. Bonds and equities have low correlation, therefore, can provide some benefit in certain market cycles.
Stock market cycles, interest rates and inflationary expectations all influence the correlation or non-correlation between stocks and bonds. You will find empirical evidence that shows that the benefit of diversifying with bonds is entirely dependent on which part of the market cycle you happen to be in. My conclusion is that it would probably be prudent to own bonds. I’m not sure whether they will improve my overall performance but I’m pretty sure I will get my principal back at maturity and receive my interest, albeit currently nominal, on the bonds.
We can also diversify with other equity classes and sectors. Different equity classes and sectors will usually rise and fall in tandem but at differing rates. There is a very high correlation amongst equity classes and sectors. So my conclusion is to own different classes of stocks, funds or ETFs. I’m not sure whether they will improve my overall performance but I think it’s wise to have exposure to different rates of return and risk.
Utilizing the strategy of B&H, we diversify with bonds and various equity products. We might even own some commodities like metals or currencies. These practices are very common and do make sense. They can help smooth out the risk/return in certain market cycles. The problem is that in significant equity market corrections virtually all equities will go down. The bonds may provide some benefit to the overall performance of your portfolio, however, since the correlation is low between equities and bonds don’t expect too much benefit.
Beware of the bear cycle
The market cycle we need to be most concerned with is the bear cycle. History shows that an investor will experience two secular bear markets during the course of his “investing lifetime”. These are the events that can destroy wealth. The timing of these secular bear markets can have a huge impact on your future. As you get older, your “recovery” time diminishes. For those of us approaching retirement our “investment years” become more important.
I’m sure we all know people who have had to postpone retirement due to the fact that the market has lost value over the past 12 years. Money managers struggle to even match the market year-over-year.
A close friend wanted me to meet with his out of town guest. This guy has a platinum account with one of the largest, full service brokerage firms. They have the majority of his money invested with five separate “best of the best” money managers. He is fully diversified with active management. In 2008, he lost 45% of his money. Since 2010 he is only up 10%. By the way, the market is up 20% since 2010. He is probably paying 1% to 2% per year for this poor performance. Needless to say he is not a happy camper. I have heard this story countless times as I’m sure you have too.
So, we follow Modern Portfolio Theory, we buy and hold a diversified portfolio with periodic rotation and hope for the best. What more can we do?
Why going to cash should be a consideration
Money managers, mutual fund managers and advisors attempt to actively manage portfolios based on certain risk/reward characteristics. They do this by buying and selling various assets depending on their mandated parameters or “style”. For example, you might invest in a mutual fund that invests primarily in growth stocks. The fund manager actively manages the fund by buying and selling growth stocks. Money managers and advisors do the same thing. They actively manage portfolios by buying and selling. When they sell a stock they will buy another stock to replace it. The mandates for the mutual fund or money manager usually require that they keep specific percentages of the portfolio “invested” according to their style. In other words, when they sell a stock they must replace it with another stock as opposed to going to “cash”. Advisors are a bit different in that they have the ability to recommend going to cash, however, we all know that doesn’t happen very often.
When looking in the rearview mirror, it’s abundantly clear that there are times when we should have gone to cash. The difficult part is knowing when or at what price to do so. Or is it even possible to do that effectively? It’s also obvious that there are times when we should own certain asset classes. Again, the difficult part is knowing when or at what price. And is that even possible to do effectively?
That’s our dilemma as investors. It’s difficult to know, at any given time, how to allocate our portfolios. That’s why we want exposure to all asset classes. We expect that exposure to minimize our risk and maximize our gain.
Knowing when it’s time to go to cash
But what about those times or prices when we should go to cash? Shouldn’t that be an option for us too? When risk appears high, wouldn’t it make sense to go to cash with at least a percentage of our portfolio?
The key would be to have a product that is actively-managed to go to cash based upon the dynamics of the market. The hope would be to attempt to both avoid devastating losses but also to participate in most market uptrends.
Let’s take a look at that too.
Actively going to “cash” requires selling or neutralizing a position in the market. Remember, actively balancing asset classes requires selling and buying. What about selling and going to cash? Actively balancing market exposure and “cash” requires selling and buying. That sounds similar.
Wouldn’t we like exposure to that also?
So how does one go about deciding when to go to “cash”? It’s a lot like deciding what to sell and what to buy. We look to the past. There is no other way to learn. We look to the past to form decisions about the future.
“Don’t Lose Money” and going to cash go hand-in-hand.
Unfortunately, there are not many absolutes about the past that show the best way to invest in the markets. Well, one comes to mind.....”Don’t Lose Money”.....thanks Mr. Buffet. Warren, not Jimmy. Maybe we should start there.
I’m not going to bore you with the math but trust me just a little on this one.....”Don’t Lose Money” is a maxim that makes a lot of sense. But I’ll take it even step farther than Warren Buffet did. It’s even more important that you don’t lose A LOT of money.
If the first rule of successful investing is avoiding loss, it goes without saying that we should all try to do that. At bare minimum, it should be part of our overall investment strategy. I guess you could think of the two corollary concepts as trying to mitigate loss and trying to avoid loss. I think both practices should be part of an overall investment strategy. I also think that avoiding loss is more important than mitigating loss. There are a lot of products to choose from to try and mitigate losses but few choices to avoid losses or capture profits.
A sell strategy success story
That reminds me of a quick story. My father in law, Fred, owned a Fidelity annuity for many years. In the late 1990’s GE offered an annuity that allowed one to lock in the account value at any anniversary date as a death benefit. I suggested he transfer his annuity from Fidelity to GE. He decided to make the transfer. His annuity tripled in value in about four years. In 2001, when the market started to roll over, I recommended that he go ahead and “lock in” his death benefit. He agreed. By early 2003 his account value had dropped to the original value and in May of 2003 he passed away. His estate received the “locked in” value that was three times the account value. This little decision made a huge impact on his estate.
The decision to “lock” his death benefit was based upon my concepts of “capturing” profits as the stock market had broken significant support. The decision to “lock” profits is similar to having a “sell strategy”. Selling is the only way to limit losses (other than sophisticated, expensive option strategies that can negatively impact gains) or “capture” profits. Some might refer to this as “timing the market”. I prefer to refer to this as “avoiding significant losses” by “capturing” profits” when risk becomes too high.
So you can see importance of “capturing” profits. Capturing profits requires going to cash. Going to cash requires selling. Unfortunately, there are not many “products” to choose from that truly try to actively avoid losses. There are a few actively managed ETF’s that do have the flexibility to go to cash, however, the choices are slim.
What long-term investors can learn from day traders
Going to cash requires selling. Selling is the only way to take profits or avoid losses. If you think about a short term "trader".........the most important aspect of his success depends on his "sell strategy". The same thing applies for the long term, retail investor. It's easy to understand that intuitively for the short-term trader but not so easy to understand for investors that are conditioned to buying and holding. But it is easy to understand the importance of avoiding massive losses.
Shouldn’t there be more products available that attempt to avoid massive losses?
In the end it’s about employing strategies that we EXPECT to balance our risk/return based on our tolerances. It’s about how our strategies compare to the risk/reward of just B&H. If we are matching market gains with less risk we are doing well. Anything beyond that year over year, decade over decade, is very significant.
I think it’s very important to actively manage a portfolio with both risk mitigation and risk avoidance. Remember, it’s all about expectations.
Hope for the future: actively-managed ETFs
Academic research is mostly mixed about the effectiveness of active management, however, isn’t that all we have? Some would argue that manager influence is negative relative to, for example, the Three Factor Model–where risk/return is based on owning small caps and value stocks forever. Even with this strategy one needs to be active about what to buy. So there are different levels of activity in managing a portfolio. It’s the decision of every individual investor to decide about their own level of active management.
There is virtually no one offering a product that attempts to “avoid” risk. There are only nine firms that offer actively managed ETFs. The big boys are now starting to apply for approval to offer actively managed ETFs. The recent growth of actively managed ETFs is about 65% vs 13% growth in actively managed mutual funds.
Actively managed ETFs is the next big thing. It’s just starting to happen. It’s a void in the market that will be filled but it is in the very early stages. But when they finally do arrive, my advice is simple. Jump on 'em.