New Money

Ulli Uncategorized Contact

I have discussed this before, but it’s an important subject that every investor wrestles with at one time or another: Should or should I not invest new money at this point?

Reader Norm put it this way:

I have been following your newsletter for some time and you saved me a lot of money last year. Would you put new money into this current market? I don’t think the TTI has recently changed dramatically and with this Dubai situation, should I leave the “new money” on the sidelines?

Since there is no clear cut answer that applies to everyone, you have to look within and first determine your risk tolerance. For example, let’s assume you are fully invested but have another $100k that you are considering deploying in the market.

To me, there are 2 aspects to that decision:

1. Take a look at a worse case scenario and determine your risk tolerance. If you were to invest your additional $100k all at once, and the markets immediately dropped thereafter stopping you out with a 7% loss (assuming you use a trailing stop loss discipline), do you find that acceptable and can you live with this result?

If you are not that aggressive, consider investing only 50% of your assets, in which case your risk has been reduced to 3.5%. Still too much? How about an initial investment of only 33%, which may result in only a loss of 2.5% when measured as a percentage of your available new money?

You only can determine where you fit in. If none of these prospects are appealing, simply don’t invest.

2. You could make the argument that for quite some time now the market has been overextended, yet it continues to higher levels after only pausing briefly. If you do invest additional monies at this time, be sure to use funds/ETFs that are less volatile.

You can select those by dropping down the M-Index rankings in my StatSheet or simply using funds with a lower beta than the overall market as represented by the S&P; 500. I talked about appropriate fund selections in more detail in Using The Benefit of Hindsight.

Ultimately, no one can tell you whether to invest new money at this time or not. It comes down to your personal decision, but if you follow my suggested process, you may find it easier to come up with the answer.

No Load Fund/ETF Tracker updated through 12/3/2009

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The major indexes kept their upward bias intact and closed the week higher.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +7.63% keeping the current buy signal intact. The effective date was June 3, 2009.



The international index has now broken above its long-term trend line by +12.43%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Reader Contribution

Ulli Uncategorized Contact

Sell stops, and especially their tracking, have resulted in a lot of reader feedback. While there are many ways to follow the high price of a fund/ETF you own, reader Kirk had this to say a few days ago:

In the spirit of Thanksgiving, I am sharing a sample of an easy to use spreadsheet for Trend Tracking.

Once it is set up, it only takes a few minutes each day to view and make any needed changes.

NOTE: To learn the formulas used for each cell, click on “View” and then “Show Formula Bar”. Then, when you click on a cell it will show the formula used.

This spreadsheet updates prices in real time. For closing prices, open after closing.

Each day, I compare the “Today” column (closing price) to the “Cycle High” column and the “StopSell” column. If the Today price is higher than Cycle High, I manually adjust Cycle High to the new price. If the Today price is lower than StopSell, I make a note to “sell” under “NOTES”. I can open the document the next morning to quickly be reminded what needs to be sold.

I use “change colors with rules” to make it easier to spot important information. Under “Notes” you can see different colors for the words “buy”, “watch”, and “sell” as examples. I also use color coding for “Date of Dividends”. If the date is less than one week old, it will be highlighted so I know to adjust my Cycle High by the dividend amount. I just added that function since Ulli wrote about adjusting for dividends.

I don’t know how many of these rules work with Excel. I am new to both Excel and Google Docs but found Google easier to learn because it has many tutorials available for Financial Data Spreadsheets.

While I personally keep all of my data on my computer, Kirk’s idea of utilizing Google Docs makes sense for those who move around a lot as part of their daily work routine. You’ll always be able to find access to a computer with internet connection to review your sell stops and/or to place trades.

Getting Squeezed By Low Volume ETFs

Ulli Uncategorized Contact

I have talked about the importance of only using ETFS with high volume to be sure that you can enter and exit at a moment’s notice. One reader had this experience:

I have a comment and question about the Nov.2 column about sell stops.

The comment: I ran into a different kind of problem recently with sell stops. I had bought a relatively low volume ETF (from a sort of tout list, I’m ashamed to say, it looked ok when I researched it– but, since I’m an amateur, I hadn’t realized the volume was low.) So when the sell stop kicked in, I was selling and it seemed nobody was buying, the sell price spiked way down before all of the position was liquidated by the automatic sell request. After this, I divided my sell stop into halves for awhile, but this was tedious so I just tried not to buy into a low volume ETF that I’d never really heard of before.

Q1: Any comments on my problem? What kind of volume would you consider necessary?

Regarding stops:

Q2: I wanted to confirm: Are you suggesting to “utilize” a stop in tracking one’s holdings, but not place it officially until you use it? Or should you actually have it in place at all time officially with your broker?

The reason I like stops is it lowers my stress. I have a tough job and am often on the road where I may not get time to log on every evening. I’ve tried to do more short-term trades but that doesn’t work for me. The stop lets me sleep peacefully.

For the most part, volume tends to increase with the size of an ETF. Generally speaking, you want an ETF with at least $50 million in assets. If you were to place a $100k order, you’d want average daily volume to be at least $2 million—more would be even better.

A real liquid ETF like QQQQ, for example, currently sports a daily average volume (according to Yahoo) of over $4 billion, which represents almost $99 million shares. Buying or selling millions of dollars of holdings in such a liquid environment is no problem at all, as I have found out in the past.

While not every ETF offers such liquidity, many have average volume in excess of $4 million traded every day, which will be sufficient for most investors.

To confirm your second question, I never enter a sell stop ahead of time. I look at my spreadsheet reflecting the day-ending prices and, if a stop has been triggered, only then will I enter my sell order the next day.

Disclosure: We currently have holdings in QQQQ.

RMD Waived For 2009

Ulli Uncategorized Contact

In case you missed, the annual Required Minimum Distribution (RMD) for IRAs and pension plans has been waived for the year 2009. This applies only to those investors over 70-1/2 years of age.

Here’s some of the wording:

On December 23, 2008 The Worker, Retiree, and Employer Recovery Act of 2008 was signed into law by President Bush. This new law will grant a temporary waiver of the required minimum distribution (RMD) from retirement accounts for the 2009 tax year only. The waiver would apply to individual retirement accounts (IRAs) and employer-provided contribution plans (QRPs, Keoghs, Individual 401(k)s, and 403(b)(7)s).

Requirements for 2008 remain unchanged at this time so clients who were over age 70 ½ in 2008 are required to take their RMD by December 31, 2008, and if they just turned 70 1/2 in 2008, they are still required to take their 1st RMD by April 1 2009.

If this is of interest to you, you can reference the full text in the above link. If it does not apply to you, please mention it to anyone over the stipulated age.

Automating Sell Stops

Ulli Uncategorized Contact

Reader Joe is trying to use some of the finance.yahoo.com features to make it easier to track his sell stops. He had this to say:

I have a related question. I too am familiar with finance.yahoo.com. In a blog post a few weeks ago, you stated the user could download information into a spreadsheet and make adjustments from there. I note finance.yahoo.com allows the user to set alerts.

Yahoo also maintains daily price history for several years. Wouldn’t it be easier, and just as effective, to determine the high price during the user’s holding period, determine the stop limit, 6% / 7%, etc. and then set an alert in finance.yahoo.com? Apparently the program sends alerts to the user’s email address.

This can work for you as long as you are aware of a few shortcomings with this approach:

1. When you set the alert price, you need to adjust it whenever the market rallies and your old high price gets taken out. Remember, this is a trailing stop loss point and not a static one.

2. In the case of ETFs, Yahoo’s alert will get triggered whenever your alert price is hit, even on an intraday basis. I use only day-ending prices as a basis for my stops.

3. When distributions occur, your trigger prices need to be adjusted to reflect this distribution as I wrote in Honing In On Bond Funds And Sell Stops.

If you are aware of these shortcomings and can live with them, by all means, use these Yahoo features. While technology is wonderful, it is not perfect, which means you can’t count 100% on receiving you email alerts on time.