Portfolio Anxiety

Ulli Uncategorized Contact

While we all enjoy the incredible benefits that technology has brought us over the past few years, there have been some disadvantages especially when it comes to handling your portfolio. Sure, instant access to all information anywhere, e-mail, the internet and customized tracking of your investments have made a mostly positive difference in all of our lives.

However, there have been some negatives too, as you can get overwhelmed by instant information overload and easily change your focus from macro to micro.

That happened to a couple of retired clients, who got stuck in that mode last year when first being exposed to ETFs. The instant price availability throughout the day caused them to watch the market incessantly while hanging on to every tick change of the ETFs they were invested in. They could not control themselves to do otherwise and finally asked me to replace the ETFs with comparable mutual funds.

Many investors are checking their portfolios several times a day or worse yet, on their cell phone. Others have the need to at least review portfolio changes once at the end of each business day.

Psychologists have proven that constant portfolio monitoring has unintended negative consequences and drains investors’ emotions based on the series of “pangs” (negative or positive portfolio changes) they experience. Here’s how Nassim Taleb describes this curious phenomenon in his book “Fooled by Randomness:”

Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.

Now that you know that high-frequency investors have more exposure to both stress and positive pangs, and that these do not cancel out, consider that people in lab coats have examined some scary properties of this type of negative pangs on the neural system (the usual expected effect: high blood pressure; the less expected: chronic stress leads to memory loss, lessening of brain plasticity, and brain damage.

What economists did not understand for a long time about positive and negative kicks is that both their biology and their intensity are different. Consider that they are mediated in different parts of the brain—and that the degree of rationality in decisions made subsequent to a gain is extremely different from the one after a loss.

Note also that the implication that wealth does not count so much into one’s well-being as the route one uses to get to it.

In my advisor practice, I have a wide variety of clients form all walks of life with all types of behaviors. I have found that those investors with busy lives (and not much interest in the markets), who only check their brokerage statements once a month, do not lose their long-term perspective as easily as those who are engaged in constant monitoring.

While it’s a natural desire for many to increase tracking of their portfolios when the markets whip-saw and meander aimlessly, much of what we have seen during the past 18 months or so, it can lead to an emotional deficit, as Nassim describes above. If you have found yourself being more on the edge lately, this may explain why.

What can you do about it? Change your habits, which is the hardest thing to do for most of us.

No Load Fund/ETF Tracker updated through 6/12/2008

Ulli Uncategorized Contact

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

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

A volatile week left the major indexes with only minor changes.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved lower and now remains -0.08% below its long-term trend line (red).



The international index dropped as well and now remains -5.65% below its own trend line, keeping us on the sidelines.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Clarification Of The Sell Strategy

Ulli Uncategorized Contact

In regards to Monday’s post “Honing In On The Sell Strategy” one reader had this to say:

In Friday’s newsletter stat sheet, you said “My sell rules are as follows: I will liquidate any of my holdings if they drop by more than 7% from their highs since I bought them, or if the TTI breaks below the neutral zone, which is a point of -1.50% below its long-term tend line — whichever occurs first.”

In Monday’s elaboration, you say “I will liquidate my domestic holdings if the sell stop gets triggered or the TTI breaks below its long-term trend line, whichever occurs first.” Which is it? Am I missing something?

Thanks for your good work.

Yes, the reader is correct; I said both. When posting the sell rules in the StatSheet after the Domestic Buy signal was generated on 5/15/08, my intention was to give the market some room to breathe to the downside, in case a sell off had materialized right after our purchase. This would have avoided an immediate whip-saw signal.

While this whip-saw did not happen, here we are less than a month later staring a new Sell signal in the face. While domestic buy cycles usually last from several months to 1-1/2 years, this one may not. From my vantage point, this is either an indication that a major trend reversal may be forthcoming or that the past upswing was merely a bear market rally.

Again, as I said on Monday, this is not an exact science, and we’re simply trying to stay out of the way of an oncoming bear market train.

Given that, I will use the latter and issue a sell signal for domestic equity funds, if the domestic Trend Tracking Index (TTI) breaks its trend line to the downside and stays there for a couple of days. Remember, markets go down a lot faster than they go up, so use the solution to get out that best fits your risk tolerance.

Wednesday Market Update:

All major indexes retreated sharply as the markets were unable to absorb news of higher oil prices and interest rates as well as questionable economic news. I took the opportunity early in the day to unload some of our more volatile positions in technology, emerging and Latin American markets.

To no surprise, our domestic Trend Tracking Index (TTI) dropped as well and has now pierced its long-term trend line to the downside by -0.40%. Barring any super rebound rally on Thursday, I will initiate some short positions to neutralize our long mutual fund holdings as discussed in Monday’s post.

If the TTI stays below its long-term trend line for another day or two, that will constitute an official “Sell” signal for the domestic arena, and I will make the announcement on this blog.

Worse Than It Looked

Ulli Uncategorized Contact

The bulls claimed victory on Tuesday because the markets held their own and closed around the break even point as the chart from MarketWatch shows. These days it seems to take very little to keep the bulls happy.

However, Fed chief Bernanke’s saber rattling about inflation and potentially higher interest rates boosted the dollar but caused other markets to decline. Heading south more sharply than the above closing figures indicate were Emerging and Latin American Markets along with Gold, Technology and the Commodity Index.

Our Trend Tacking Indexes (TTIs) declined as well and are hugging their long-term trend lines as follows:

Domestic TTI: +0.16%
International TTI: -5.59%

Domestically, we are approaching a sell signal, barely 30 days after receiving the Buy on 5/15/08. If this sell comes to pass, it will definitely qualify as a whip-saw signal. I will clarify my exact exit strategy tomorrow as there seems to be some confusion based on several readers’ emails I received.

Municipal Defaults Triple

Ulli Uncategorized Contact

Over the past few months, I have expressed my hesitation in investing in any municipal bonds or bond funds. Many readers have emailed me regarding my thoughts on various opportunities in that arena.

I believe that the continuing fallout from the Subprime/credit/real estate crisis will have negative economic effects with the exact extent still being ahead of us. One “casualty” of reduced revenues due to weak real estate prices and record foreclosures will most likely be those municipalities with weak balance sheets, which covers just about everybody.

The first county to fail was Vallejo, California, but Jefferson County in Alabama faces its own set of problems along with many others that are still unknown. Mish at Global Economic Trend Analysis had some updated information on the tripling of Muni defaults this year over 2007.

Here are some highlights:

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the “Distressed Debt Securities” newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you’re counting, was 1991, when almost $5 billion went bust. That’s still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We’re probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

I have to admit that I am uncertain as to how deep and lengthy the effect on municipals bonds/funds will be. Given that uncertainty, my personal view is that I’d rather not invest in anything that currently has such a potentially negative outcome; I suggest you do the same.

Honing In On The Sell Strategy

Ulli Uncategorized Contact

With the market trends zigzagging, and our domestic Trend Tracking Index (TTI) having moved closer to its long-term trend line (+0.73%), a potential Sell signal has become a possibility again.

One reader had this question:

Would you please take a moment to elaborate on your sell strategy?

You will sell if the TTI falls below the 195 day MA. Will you sell even if the price of your mutual fund has fallen only by, say, 4%? Or will you wait till the price drops by 7% though the TTI has fallen below the 195 day MA?

Your posting on Trend clarification is great. But if you could elaborate on your sell strategy, it will benefit people like me.

My apologies if the question is unclear.

As I mentioned in my weekly StatSheet, I will liquidate my domestic holdings if the sell stop gets triggered or the TTI breaks below its long-term trend line, whichever occurs first.

At the end of the last domestic Buy cycle (1/18/08), all of our positions had been sold before the TTI pierced its trend line to the downside. Right now it appears, with the current buy cycle not even being a month old, that the reverse might happen.

Please remember that this in not an exact science. The goal is to be out of the market before major portfolio damage due to a possible bear scenario occurs.

If in fact we head further south, and the Trend line gets violated to the downside, I will sell or neutralize my domestic holdings. What that means is that I have basically two options:

1. Sell all domestic mutual fund/ETF holdings outright, or

2. Sell all domestic ETF holdings, but hold the mutual funds and add an equal amount of short positions to offset the potential drop. In other words, I would be market neutral at that point.

The first choice is pretty clear, so why would I consider the second one? The main reason is that we have only held the mutual funds for a month and are still subject to the 90-day short-term redemption fees. While the fees have become relatively modest ($49.95 at my custodian), some mutual fund companies may not like the short-term sale and could ban me from further trading.

This is an option that was available a few years ago, and I may very well consider it. The short S&P; 500 (SH) ETF lends itself to such a transaction. If subsequently the markets go one way or the other, I can then later on remove the hedge and become net long or short again.

If you find yourself in a similar situation in regards to your mutual fund holdings, you may want to consider this kind of approach.