In regards to my recent post “How Many Positions Should You Have,” one reader had this question:

How should we view our “Portfolio” when we have several accounts (i.e. 401K, IRA, Broker, etc)?

Should all be considered one portfolio or separate? Would a single 8% position equal 8% of the total of all accounts or would it be for a single account? This question is related to the total number of positions and position size.

While there is certainly not just one way to handle this, my preference is to look at each account separately. For example, if you have a $100k IRA, then you should allocate as per this portfolio value. If additionally, you have started a small Roth-IRA worth $7k and a brokerage account with $25k then look at these as separate entities. A small account may only justify being invested in 1-2 mutual funds/ETFs, while a larger one should obviously be more diversified.

Along a similar theme, reader Ralph had this question:

I am interested in a hedge for my IRA and taxable accounts. How do you determine how much to buy of a fund like SH or SDS? Would it be best to buy the hedge (fund) in the taxable account to cover both accounts? For example, I have 150,000 invested in the taxable account and 500,000 in the IRA account.

Thank you.

Again, there are many ways to approach this. Let me give you an example of how I have handled this in my advisor practice. Towards the end of the last Buy cycle, we were invested in 2 widely diversified domestic mutual funds with a total 20% portfolio allocation.

I purchased 20% of the short S&P; 500 ETF (SH) to cover those positions. You’d think that this hedge now would cancel out any gains or losses on either side. That did not happen so far.

During the past 10 days, and the drubbing in the financial markets, SH has gained more in value than the mutual funds have lost, giving us a gain of over 1% on the invested amount during that time.

Whether you use SH, or the 200% turbo version SDS on only 50% of your positions, is a matter of preference. In any event, I would treat both accounts as separate entities. As time goes on, I will comment more on hedging strategies as they apply to mutual fund/ETF investing.

Reader Gary brought up an interesting question regarding the fact that a new domestic Sell signal has been generated after just having received a Buy signal on 5/15/08. Here’s what he had to say:

Enjoy your newsletter very much. You are on the “mark” with your criticism of government “doublespeak”.

I know you are not in the “prediction” business but I would like your opinion of “Failed” signals and what they might mean to your trend tracking.

I have looked back through my records all the way back to 1991. The closest incident may be the events as they shaped up in the year 2000. Take a look at the chart below (double click to enlarge):



This is our domestic Trend Tracking Index (TTI) and the topping formation (on the left), which occurred during the blow-off period starting in April of 2000. Notice that we subsequently went through 3 very short-term whip-saw signals (the buys are the blue arrows) before the bear trend was confirmed, and we finally exited to 100% cash on 10/13/2000.

As you can see, while in the bear market, we experienced another whip-saw, this one lasting about 3 months (from 3/7/02 to 6/12/02), which turned out to be the precursor of the bottom of the bear market and the subsequent turnaround, which moved us back into equities on 4/29/2003.

While this past history is certainly not conclusive, I believe that a short-term Buy signal is a sign of uncertainly and could possibly be considered a blow-off until the real major trend settles in. In today’s market environment, that would translate into bullish rally attempts before a bear market establishes itself.

Since we won’t know for sure how this current scenario will play out, you simply need to follow the trends even if it means a whip-saw or two. The ultimate goal here is not to go down with the bear, which you need to avoid at all costs, especially if the future holds anything like past represented in the above chart.

MarketWatch featured an interesting story titled “How old is too old?” Here are some highlights:

An irritating question is being raised anew about candidates in this year’s election campaign: How old is too old?

And he was able to make this transition with barely a shock to the system. As Safire admonishes one and all, “Never retire.”

The key lies in the last sentence. I have found that after having dealt with thousands of people in my advisor practice that those of retirement age but with active, busy or even working lives fare much better in the mental health department vs. those who hang around the house all day with no goals other than the weekly golf game.

I have had the good fortune of meeting several people in their mid 90s who where as sharp and up-to-date on events as any 50-year old. My view is that while retirement from an undesirable, stressful corporate job maybe better for your overall health, you still need to replace idle time with worthwhile endeavors. There seems to be a change in mindset as a some new clients in their late 80s, who came aboard a few months ago, had no interest in generating income from their assets but were strictly interested in growth of capital.

And then there is Richard Russell, the editor of the Dow Theory newsletter, who still writes every day, and he is in his 90s.

Whether running for political office or managing your personal life, physical fitness and mental agility go hand in hand and both need to be taken care of. If either fails, all bets are off. Personally, I have been a fitness buff for a long time. Having played tennis for the last 45 years, along with regular visits to the gym, I hope to make my career a very long one.

We all have idols and mine is an acquaintance named John. He is 85 years old and frequents the same tennis facility as I do. He still plays four times a week (on a 4.0 level) and runs a consulting business from his ocean front home. He has no intention of slowing down either activity, which puts him way ahead in the pursuit of a long and happy life.

MarketWatch featured an interesting article titled “Learn a lesson—before you get one.” It contained 10 investment rules to live by which, given the fickle and directionless nature of today’s market, may help you keep things in proper perspective by focusing on the big picture.

While most rules have some merit, I want to focus on only one (number 6), which seems to give investors the most trouble:

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold.

“It’s critical for investors to understand how they’re cut,” says the Prudent Speculator’s Buckingham. “If you can’t handle a 15% or 20% downturn, you need to rethink how you invest.”

Please read the last paragraph again, which obviously refers to a buy and hold scenario. While every investment approach has its difficult periods, I have found that most clients struggle with the fact that portfolios will fluctuate. It’s a fact of life—live with it or don’t invest!

Some investment approaches, such as trend tracking, may keep you more above water during times of uncertainty, but draw downs of up to around 10% are within an acceptable range. Please note that I said acceptable, not likeable!

Buy and Hold scenarios will not only expose you to the above mentioned 15% to 20% downturns, but far worse. When the inevitable bear market strikes, and it will, pulling your portfolios down closer to the minus 50% area, you will suddenly realize that working with sell stops and suffering through a few whip-saws while seeing portfolio fluctuations in the 10% area is a far better choice.

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

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

A break to the downside sent all major indexes further south generating a Sell Signal for all domestic equity funds.

Our Trend Tracking Index (TTI) for domestic funds/ETFs broke decisively below its trend line (red) by -0.93% thereby ending this short buy cycle of 30 days:



The international index dropped as well and now remains -7.63% 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.

The domestic Trend Tracking Index (TTI) has been holding up better than the major indexes over the past few days, but Wednesday we headed again slightly below the long-term trend line.

As of yesterday, the TTI had dropped -0.16% below the line, but I will wait a few more trading days for further downside confirmation before issuing a domestic Sell signal. The culprits for this downward action were the financials along with evidence that ever rising oil prices are disrupting the economy.

Be that as it may, being stuck in the neutral zone requires us to wait until a price breakout to either side occurs before we can take further action. Many sectors and country funds have been zigzagging, which means many trends have come to an end or at least volatility has increased to such a point that staying away from these arenas appears to be the soundest course of action, at least for the time being.

My hedge against our long mutual fund positions is working well as the gains on one side more than offset the losses on the other.