Here we go with the second batch of “answers” to last week’s AMA (Ask Me Anything) blog. I’m combining a few of the questions that worked well together in this issue. One quick announcement before getting to the questions:
Big news! My new book is officially on the market!
You can grab your copy here
Buy online from Amazon or Indigo
For those who pre-ordered, I am waiting for the box of 300 books to arrive and will arrange to send your copy out as soon as I get them. Cindy in my office will be in touch with your discounted price. if you are a blog reader, you can still get a signed copy at a discounted price. Cindy is keeping track of the pre-orders and I understand they are not sold out yet.
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Buy n’ hold, & ETF strategy
Louis asks if there is a strategy that could more or less be left passively (buy n hold) for a registered account such as TFSA. Tied into this question was John’s enquiry regarding his allocation strategy given that he has been a long-termed investor holding an overweight potion in equity ETF’s (effectively 85% diversified world equity vs 15% fixed income/cash). Finally, Michael asks what sectors or funds might be suitable for a longer termed investor wishing to remain invested, but is concerned regarding the potential for a bear market. I can tie Michael’s enquiry in with the other two questions effectively in this answer, I hope.
To cover Louis’s question – the ETF strategy that John uses is not such a bad idea for long-termed passive investing. World equity indices do tend to trend up over the long term. So, assuming you are young and/or do not plan on using the capital for at least 5++ years… Equity indices are diversified and quite effective over the long term. The downside to the strategy is that there will be market volatility (10% or so downdrafts here and there that last a couple of months or so), and to Michael’s enquiry, the occasional bear market (bigger downdrafts that in some cases may last longer- perhaps a year or more). That’s why I emphasize to Louis to look at equity index investing as a long-termed strategy if you are going to be passively investing. You don’t want to be in the middle of a bear market when you were planning to liquidate that TFSA. You need to have the time to wait out the bad times. The chart of the DJIA going back to 1900 illustrates this concept of long-termed growth regularly interrupted by volatility, prolonged sideways periods – and occasionally outright bear markets
So – let’s get back to John’s question. Should he raise more cash to decrease his equity exposure?- He is assuming that risk is higher on the markets right now. I don’t disagree with your assessment, John. Still, as a technical guy, I tend to wonder if you are looking at the market from a near termed view vs. the long term. I am a mid-termed trader. As such, I use tools like the Bear-o-meter and near termed price patterns to reduce or increase equity beta fairly frequently. I am not a long-termed investor on any instrument. And ValueTrend doesn’t bother with broad indices for the long term. ValueTrend uses broad index exposure occasionally in specific situations (eg we like commodities so we currently hold 2 commodity-exposed country ETF’s with no intention of holding them past their potential period of outperformance). But it sounds like you are a longer termed investor than I am. As such- sure, you could alter your asset allocation to reflect a higher cash allocation. To your example of perhaps shifting that by 5% or so- It sounds like your minor shift is sensible if I am correct in your longer termed outlook.
Michael’s question regarding longer termed strategies that might do well in a bear market…again, we are in dangerous territory if we try to predict a bear before the bear emerges. That’s what hypochondriacs do surrounding their health. I like following the trend. And the sentiment studies. Read my new book (Smart Money, Dumb Money) when it comes out – hopefully, this Friday or early next week. I will announce the official release. When the technical’s and the sentiment studies suggest that the market is, in fact, likely to be in bear market conditions–we can employ strategies. But not until then My go-to is beta reduction. That means raising cash and lowering individual stock beta. The cash provides ammunition for buying cheap stocks when the bear is over, and it reduces your downside via less exposure. The lower beta stocks keep you in the game in case your assessment is wrong (yes, we can be wrong!) yet offers less risk if we are right about a bear market. Beyond that, there are hedge funds that employ strategies like paired trading and market neutral or macro analysis strategies. And there are inverse ETF’s and shorting strategies that I have covered before. Here is a video. Here is a blog. Both are on that subject.
Books for beginners
Robert asks for a list of beginners’ books on investing. The challenge that I face here is there are many, many such books out there. So, I am just skimming the surface here with my paltry list of beginners’ books. Here they are, for what it’s worth:
10-year yield
Harry asks a fairly straightforward question: where might the 10-year treasury bond yield land? I’m assuming Harry refers to the US treasury bond. The chart below paints the picture. What you see is a failed test of resistance near 1.80. We’ve broken the 50 day SMA, and the big picture momentum indicator MACD is decidedly bearish. However, stochastics (near termed momentum) is oversold and possibly going to hook up, indicating a possible rise in the near term. RSI is trending down and may find support as it hits its oversold levels. My target, should the market continue to see lower treasury yields per the longer termed chart view at this time, would be a test of the former base neckline yield. That’s near 0.9 or 1.00. We’ll have to see if the stochastics signal results in a bigger rally than I would expect, or if the big picture drawdown in yield plays out. For those unfamiliar with the concept – a falling yield means a rising bond price. In other words, the mid termed picture for the 10-year looks reasonably bullish, despite the potential of some near termed noise.
