Category: Exchange-Traded Funds

Exchange-Traded Funds

The Growing Popularity of Trading

Matt Choi

There’s no doubt that trading has become more popular over the past decade or more. For some investors, working from home, where ever home might be, and earning consistent profits through trading stocks, options, futures, or currencies, is both appealing and lucrative.

On top of that, markets are more accessible than ever, information is readily available and internet access has become widespread. Perhaps even more importantly, experts are willing to share their knowledge, so mentoring and coaching help are accessible.

However, no one is saying that trading to earn money is easy. You need market knowledge, a willingness to dig deep on technical patterns and an understanding that all trading requires some level of risk.

Successful trading also requires a specialized mindset, an idea explored in my 2014 co-authored book, The Winning Way.

3 Traits Every Trader Needs

In The Winning Way book, we look at three psychological mindsets that are necessary for a trader, regardless of experience, to be successful. Those mindsets are: one, accept market uncertainty; two, focus on the “now”; and three, think probability.

I thought it would be useful to outline these qualities in a little more detail here.

Accept Market Uncertainty

You have to believe that each trade is a random event and the outcome is out of your control and beyond any kind of analysis. Unless you know what each of the millions and millions of investors and other market participants are betting on each day, it’s impossible to predict what the markets will do.

I began making a trading profit when I started to believe in my own tools and systems for trading. I accepted that markets are uncertain and that leads to randomly distributed winners and losers, at least in the short term. However, in the long run, I trust that my edge gives me a higher probability of winning than losing.

Focus on Now

We’ve all been conditioned to learn from past experience. That works, mostly, since a change in behaviour usually leads to a different outcome. But in trading, it is detrimental to associate current trading decisions with past results. As every mutual fund prospectus tell us: Past results are not indicative of future performance. Professional traders understand that each trade is random, operating independently of previous trades.

Great traders focus only on opportunities that are happening right now.

Think Probability

The focus on uncertain markets can be difficult for some traders as they wonder how to achieve consistent and profitable results in such an environment. Although markets are uncertain in the short run, long-term predictable results are achievable. Your own trading strategies and systems give you an edge. You will have both winning and losing trades in the short run, and in the long run your edge will give you a higher probability of winning than losing. Being able to understand probability also helps you become a more disciplined trader. You will be able to trade with less emotion, allowing you to think more clearly and ultimately make better trading decisions.

My Story

I started trading in 2001. By 2003, my initial success had disappeared. I was spending thousands of dollars on complex trading systems that just didn’t work. In short, I was struggling to find a new path that would suit my goals.

At that time, I was fortunate enough to meet the late George Fontanills, one of most respected options traders in the world. I needed George to help me understand my trading personality and what type of trading would be most suitable for me. More importantly, I needed a mentor to send me on the path of developing a winning mindset.

George mentored me on trading strategies and techniques, but most importantly, he guided me to my own trading personality. He knew I wasn’t suited to day trading, because I hated the idea of staring at a screen all day. He also knew I didn’t have the patience for long-term trading. So he came up with the idea of short-term or swing trading.

Swing Trading

The timeframe of my trades is anywhere from a few days to a few months, depending on the stock and market volatility. And because swing patterns are highly repetitive and happen over and over again, stock movements can be predicted with a high degree of accuracy.

George was able to pinpoint my strengths and weaknesses as a trader. He taught me valuable risk management skills and how to protect my trading capital. He also taught me how to trade small but win big, and how to scale up. Under George, I learned to focus on mastering one or two markets before expanding into other areas of trading.

In conclusion, I believe that you must apply the three psychological mindsets mentioned above at all times to keep trading simple. If you can do all that, you will see a breakthrough in your trading, and very soon you will become a consistent and profitable trader well on your way to achieving success.

Understanding the Differences Between Financial Advisors and Brokers

Ed Rempel
Advice Channel
Advisors Channel

As a fee-only financial advisor, I am surely biased to this type of advisor. I do think everyday investors are much better off if they have someone in their corner who is recommending a particular investment product because it actually is the best product for them, given their circumstances and life stage. Not because there’s a commission on the sale at the end of the day.

That doesn’t mean, though, that you shouldn’t be mindful of possible issues – and that’s for any financial advisor, whether fee-based or full-service brokers. For that matter, you also should be mindful of potential drawbacks to other options that may seem (superficially, at least) appealing.

Let’s look at the options.

Fee-only financial advisors are considered advantageous because there’s no inherent conflict of interest as there can be with full-service or commission-based brokers. Brokers often recommend investments owned by their company, which is an inherent conflict.  You simply have to consider whether the products recommended are going to be best for your personal financial goals.

What you pay for is financial guidance, planning and assistance. This may be a flat fee. Some advisors charge a percentage of your account’s assets. You may be able to negotiate the amount. But, the fees you pay do not fluctuate according to the type of investments that are being recommended. What you get with this approach is objectivity and investment advice that’s unbiased. Your interests and your advisor’s are aligned.

The commission-based approach to financial advisory services is less the norm today than in the past. You open an account or buy a stock or bond and your advisor gets a percentage. Recurrent trading may also be encouraged – which may not be good for investors with a longer-term perspective. This all can pose a conflict with your best interests and goals.

And on the do-it-yourself front? Well, as attractive as this might sound on the surface, consider the relevance of the saying about the attorney who represents himself. For investment purposes, you might find good information online, but it’s just as likely you’ll find speculative information, if not real fake news. Investing is a risky business; if you don’t have the time or the expertise to do an adequate job of qualifying research, get a professional to help. Your future – financial and otherwise – depends on it.

Speaking of your financial future, it’s never too early to start planning for it. That means Millennials – and even the oldest Generation Zs who are just entering the workforce – should be putting money aside as they think about their long-term financial goals. It’s a challenge, of course, especially for those who are still trying to pay off college. Retirement is maybe too much to think about, right?

With that said, I’ve developed a service package to make it less painless. My new Robo-Advisor Professional service package is specifically targeted to the needs of Millennials and utilizes an in-depth financial data collection sheet, as well as a plan discussion with myself, to collect essential information about your financial background and goals.  This provides a strong base of understanding for clients to invest in ETFs through WealthSimple with a superior portfolio manager with a track record of beating the index.

ETFs are ideal for those with more limited resources, as a “wrapper” around a group of securities. They have a cost advantage over individual stocks and can be traded commission free. They’re similar to mutual funds, but with more flexibility as they can be traded throughout the day, not just once.

Mutual Fund Newsletter

Mutual Funds Newsletter Canada

James Dean
Mutual Fund Newsletter
Mutual Funds Newsletter Canada – Canadian Mutual Funds

Mutual Funds Newsletter is proud to join some of Canada’s top investment and finance professionals as a regular writer for MUTUALFUND.CA and the electronic and industry trade publication called ‘Mutual Fund Magazine’ that is an RRSP Season favorite for mutual fund dealers, representatives and advisors.

Mutual Funds Newsletter is at the top positions of yahoo, google, bing and youtube. The monthly Canadian Mutual Funds Newsletter is available in part online and is primarily sent with CASL approved email newsletter systems. The Mutual Fund Newsletter is the one and only premium communique that is completely free of charge. MutualFund.ca the keyword website that best defines Mutual Funds and the mutual fund industry at large. The entire portal of mutual fund sites protects the interest and sentiment of mutual funds and capital markets in Canada with respect to investors, advisors and product manufacturers.

The Mutual Fund Industry is worth well over 1 trillion dollars of Canadians hard earned capital. A concentration of assets under management worth considering in general and investigating further your place in it. Enjoy the monthly Mutual Fund Review the entire mutual fund market at a glance with winners and losers by sector and by category.

Mutual fund companies, dealers, representatives, advisors and managers are welcome to participate with news, stories, information, data and more. Make the Mutual Fund Newsletter better with your love and support for the sake of Canadian Financial Literacy and the promotion of mutual fund education.

The MUTUAL FUNDS Newsletter – representing You and Your Money®

Join Ed Rempel and like us, tell your friends about us and join us for all the right reasons. #trilliondollarfunds

MONEY.CA News – [email protected] – 416-360-0000

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Ed Rempel – Not Sold on ETF’s and Index Funds

Ed Rempel

Why I Won’t Own an Index Fund or ETF

 Skilled Fund Managers

Many investors are skeptical that there exist fund managers who have skill and who can beat the index over the long-term. Other investors believe that there are fund managers who have skill, but that it’s impossible to identify them ahead of time.

There are skilled fund managers that can be identified ahead of time. I know quite a few of them. You just have to look using the right criteria.

Identifying Skill

When looking at funds, many investors take an objective approach and study recent returns, look at ratings or statistics, or try to forecast which sectors will perform well.

Other kinds of skill evaluations are more subjective and rely on insider judgments, e.g., doctors assessing other doctors, or even actors judging performances of their peers.

The evaluation of a fund manager falls somewhere in between those two approaches, the objective and the subjective. I believe that, to find the best fund managers, you have to study them, not the fund.

Start by finding fund managers that have beaten their index over their career or long periods of time. This could be in more than one fund. They do not need to beat the index every year – just over time. Then study them to find out how they do it. Is it because of stock-picking skill?

Outperforming the appropriate indexes is just one factor in the criteria. Top fund managers are usually not trying to secretly follow the index–they’re more likely to have an effective style (like value investing), and have high “active share,” which means that they’re investing in a way that differs from the index; they also often have great experience and have their own money invested in the funds that they manage, i.e. “skin in the game”.

My All-Star Fund Managers

One of my special skills is identifying all-star fund managers — it’s essentially my main focus related to investments. I’ve found around 50 fund managers over the years who I would characterize as having superior skill, and all of them have beaten their index over long periods of time.

Most of those 50 managers are on my “watch list”. I own only a handful of those funds. Although I’m resistant to the idea of sharing statistics about my own personal investments, mostly because my investment style may not be suitable for every investor, I want to emphasize that it’s possible to identify skilled fund managers early and ahead of time.

Why I Will Never Own an ETF or Index Fund

I won’t ever own an ETF or an index fund because I’m not happy with below-index returns. I choose investments based on the fund managers–I want to invest with the Albert Einstein of investors, the absolute best. ETFs and index funds don’t have fund managers, so I’m not interested. The goal of investing is to obtain the highest long-term return after fees, and a skilled fund manager provides enough value to pay for those fees and more.

Above-Index Returns

There are really two options when you’re pursuing above-index returns: one, you can find yourself an all-star fund manager, or, second, you can choose a portfolio manager who’s paid by performance fee. When portfolio managers are paid by performance fee, they’re motivated to beat their index. If they don’t beat the index, the fees are similar to ETFs. If they do beat the index, the fee pays for itself.

Getting above-index returns is all about finding skill.

How to Start a Forex trading business

David Jackson

Forex trading can be very profitable if you know the rules of the game. Many Forex traders lose money in the beginning but it can prove to be highly lucrative once you get familiar with the arena. It can be a challenging task but putting in your efforts will surely pay you off.

In order to be a successful Forex trader, you need to continuously learn about it. Even if you become a pro, revisit the basics as one of the biggest secrets in your Forex success lies in the fundamentals.

In forex trading, some people make millions while some lose millions, but one thing is for sure, you will learn a lot. The key to success in forex trading is that treat it as a business. Do not rely on luck and get rid of impulsive approaches. You will need the proper knowledge of how things are done. Hone your skills continuously by learning new things in the field. Devise your own forex trading techniques and slowly you will beat the market. Nevertheless, here are some tips to get started in forex trading business:

  • Gain experience

 

The Internet is full of ideas to teach you on how to get better in forex trading but the experience is the best teacher. Understand the basic forex terminology. Get knowledge on the type of currency you will spend. Get aware of terms like quote currency, long position, short position, ask price and the spread. Make predictions about the economy and be political in your approach. Go through economic reports to make well-informed decisions.

  • Initiate

 

You can even start your forex trading business venture from your computer but make sure that there is a proper Internet connection set up because you don’t want to lose on great trading opportunities.

Whatever trading ways you begin with, make sure you are partnering with quality ones. You don’t want to be part of scams and lose a great deal of money. Nobody guarantees anything in this field so you are responsible for yourself. Stick to popular online trading platforms that have good proven track records and has a wide-spread company network.

  • Hone your skills

 

Forex trading is a combination of different skills. Make sure you polish them constantly as you progress in your business. Learn how to calculate profits and analyze the market. Analyze the market technically, fundamentally and sentimentally to get different perspectives of how the field operates. Keep a track of your profits and losses.

Forex trading is all about control. Keep yourself grounded and trust the basics. It is like other businesses. Do not get excited when you get an opportunity before you. Make relevant evaluations and assessments before taking any step further. Losing money is very common in forex but it is part of the game. Hone your self-control and risk management skills to excel the game of forex.

Be patient and persistence if you are interested in forex trading. The most important thing you must do is to learn from your mistakes and progress forwards. Keep in mind that only progressive mindsets reach the pinnacles of success in forex.

4 Things You Should Know Before Becoming a Forex Trader

David Jackson

So you’ve decided to try your hand at the forex market, and although you’ve done some research on the topic, you’re still not quite sure what to expect. This is a common problem faced by novice traders because many forex articles are stuffed with filler and don’t really provide a great deal of insight into what it’s like to be trader or what you should expect to gain by becoming one. With that said, here are four things everyone should know before participating the forex market:

1. The Market is Open 24 Hours, But There Are Best Times to Trade

While you’ve probably read that the forex market is open 24 hours, it’s important to note that most trades take place during trading hours. There are four separate forex markets around the world – New York, Tokyo, London, and Sydney – each with their own open and close hours. Between 8:00 AM to 12:00 PM the London and New York sessions overlap each other, so these are the busiest times of the day. If you’re aspiring to become a forex trader and are trying to devise a work schedule, it would be wise to become familiar with the forex trading time sessions first.

2. You’re Not Going to Get Rich Quick

Many people hear the term “day trader’ or “forex trader” and immediately associate the occupation with wealth and prestige. The fact is, most forex traders already had some funds saved up before they got into trading, so if you’re looking for a reliable career that is going to launch you from poverty to filthy rich in a few months, forex trading is not it. If, on the other hand, you’re looking for a way to invest and grow your savings on a daily basis, and are willing to put in the hard work to become proficient trader, then it’s probably worth your while.

3. You Need to Be Emotionally Mature and Patient

It’s no secret that only about 10% of forex traders are actually making consistent profits and decent income in the forex markets. The other 90% are mostly inexperienced traders looking for ways to supplement their day job income or overzealous traders who keep fuelling themselves with the occasional wins despite taking a loss overall. Now, 10% might seem like an elite group of traders that you could never become part of, but when you consider the number of people entering and leaving the market each year, really all it takes is some persistence, research (especially regarding the main reasons traders take losses), and intelligence to become part of the minority that has figured the system out.

4. Going Without Tools and Services is Like Setting Yourself Up for Failure

Some traders try to take the old-fashioned approach and do all of their trades and research manually, without relying on any third-party tools, resources, or services for help. While this approach might work for a highly skilled professional with years of experience under their belt, it’s almost a sure fire way to lose money as a new entrant in the market.

If You’re Looking for an “Easy” Job, This Isn’t It

A lot of people think ”Hey, I get to stay at home making trades all day, how hard could it be?” While it’s true that conducting trades is easy, consistently choosing trades that are profitable is where the challenge comes in. If your goal is to be a successful trader, plan to study even more than you trade.

Index and Sector ETFs: Mutual Funds: Speculation X3

Steve Selengut

How many of you remember the immortal words of P. T. Barnum? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a greed-driven rush to financial disaster.

The dot.com meltdown spawned index mutual funds, and their dismal failure gave life to “enhanced” index funds, a wide variety of speculative hedge funds, and a rapidly growing assortment of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs.

How far will we allow Wall Street to move us away from the basic building blocks of investing? Whatever happened to stocks and bonds? The Investment Gods are appalled.

A market or sector index is a statistical measuring device that tracks prices in securities selected to represent a portion of the overall market. ETF creators:

  • select a sampling of the market that they expect to be representative of the whole,
  • purchase the securities, and then
  • issue the ishares, SPDRS, CUBEs, etc. that speculators then trade on the exchanges just like equities.

Unlike ordinary index funds, ETF shares are not handled directly by the fund. As a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the index they were selected to track. Confused? There’s more — these things are designed for manipulation.

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund.

These activities create artificial demand in an attempt to minimize the gap between NAV and market price. Clearly, arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low — and why there are now thousands of the things to choose from.

Two other ETF idiosyncrasies need to be appreciated:

a) performance return statistics for index funds may not include expenses, but it should be obvious that none will ever outperform their market, and

b) index funds may publish P/E numbers that only include the profitable companies in the portfolio.

So, in addition to the normal risks associated with investing, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies.

We then call this hodge-podge of speculation a diversified, passively managed, inexpensive approach to Modern Asset Management — based solely on the mathematical hocus pocus of Modern Portfolio Theory (MPT).

Once upon a time, but not so long ago, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their diversification. Does diversified junk become un-junk? Isn’t passive management as much of an oxymoron as variable annuity? Who are they kidding?

But let’s not dwell upon the three or more levels of speculation that are the very foundation of all index and sector funds. Let’s move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management.

Mutual Funds were a monumental breakthrough that changed the investment world. Hands-on investing became possible for everyone. Self-directed retirement programs and cheap to administer employee benefit programs became doable.

The investment markets, once the domain of the wealthy, became the savings accounts of choice for the employed masses — because the “separate accounts” were both trusteed and professionally managed. When security self-direction came along, professional management was gone forever. Mutual fund management was delegated to the financially uneducated masses.

ETFs are not the antidote for the mob-managed & dismal long term performance of open end Mutual Funds, where professionals are always forced to sell low and to buy high. ETFs are the vehicles of choice for Wall Street to ram MPT mumbo jumbo down the throats of busy, inexperienced investors… and the regulators who love them because they are cheap.

Mutual fund performance is bad (long term, again) because managers have to do what the mob tells them to do — so Wall Street sells “passive products” with controlled content that they can manipulate more cheaply.

Here’s a thumbnail sketch of how well passive ETFs may have performed from the turn of the century through 2013: the DJIA growth rate was about 0% per year, the S & P 500 was negative; the NASDAQ Composite has just recently regained its 2000 value.

How many positive sectors, technologies, commodities, or capitalization categories could there have been?

Now subtract the fees… hmmmm. Again, how would those ETFs have fared? Hey, when you buy cheap and easy, it’s usually worth it. Now if you want performance, I suggest you try real management, as opposed to Mutual Fund management… but you need to take the time to understand the process.

If you can’t understand or accept the strategy, don’t hire the manager. Mutual Funds and ETFs cannot “beat the market” (not a well thought out investment objective anyway) because both are effectively managed by investor/speculators… not by professionals.

Sure, you might find some temporary smiles in your ETFs, but only if you take your profits will the smiles last. There may be times when it makes sense to use these products to hedge against a specific risk. But stop kidding yourself every time Wall Street comes up with a new short cut to investment success.

There is no reason why all of you can’t either run your own investment portfolio, or instruct someone as to how you want it done. Every guess, every estimate, every hedge, every sector bet, and every shortcut increases portfolio risk.

Products and gimmicks are never the answer. ETFs, a combination of the two, don’t even address the question properly — AND their rising popularity has raised the risk level throughout the Stock Market. How’s that, you ask?

The demand for the individual stocks included in ETFs is raising their prices without having anything to do with company fundamentals.

What’s in your portfolio?

How will ETFs and Mutual Funds fare in the next correction?

Are YOU ready.

Brave Old World: Market Cycle Investment Management

Steve Selengut

The Market Cycle Investment Management (MCIM) methodology is the sum of all the strategies, procedures, controls, and guidelines explained and illustrated in the “The Brainwashing of the American Investor” — the Greatest Investment Story Never Told.

Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutions. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time.

MCIM combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and “base income” generation in an environment which recognizes and embraces the reality of cycles. It attempts to take advantage of both “fear and greed” decision-making by others, using a disciplined, patient, and common sense process.

This methodology thrives on the cyclical nature of markets, interest rates, and economies — and the political, social, and natural events that trigger changes in cyclical direction. Little weight is given to the short-term movement of market indices and averages, or to the idea that the calendar year is the playing field for the investment “game”.

Interestingly, the cycles themselves prove the irrelevance of calendar year analysis, and a little extra volatility throws Modern Portfolio Theory into a tailspin. No market index or average can reflect the content of YOUR unique portfolio of securities.

The MCIM methodology is not a market timing device, but its disciplines will force managers to add equities during corrections and to take profits enthusiastically during rallies. As a natural (and planned) affect, equity bucket “smart cash” levels will increase during upward cycles, and decrease as buying opportunities increase during downward cycles.

MCIM managers make no attempt to pick market bottoms or tops, and strict rules apply to both buying and selling disciplines.

NOTE: All of these rules are covered in detail in “The Brainwashing of the American Investor” .

Managing an MCIM portfolio requires disciplined attention to rules that minimize the risks of investing. Stocks are selected from a universe of Investment Grade Value Stocks… under 400 that are mostly large cap, multi-national, profitable, dividend paying, NYSE companies.

LIVE INTERVIEW – Investment Management expert Steve Selengut Discusses MCIM Strategies – LIVE INTERVIEW

Income securities (at least 30% of portfolios), include actively managed, closed-end funds (CEFs), investing in corporate, federal, and municipal fixed income securities, income paying real estate, energy royalties, tax exempt securities, etc. Multi level, and speculation heavy funds are avoided, and most have long term distribution histories.

No open end Mutual Funds, index derivatives, hedge funds, or futures betting mechanisms are allowed inside any MCIM portfolio.

All securities must generate regular income to qualify, and no security is ever permitted to become too large of a holding. Diversification is a major concern on an industry, or sector, level, but global diversification is a given with IGVSI companies.

Risk Minimization, The Essence of Market Cycle Investment Management

Risk is compounded by ignorance, multiplied by gimmickry, and exacerbated by emotion. It is halved with education, ameliorated with cost-based asset allocation, and managed with disciplined: selection quality, diversification, and income rules— The QDI. (Read that again… often.)

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires daily decision-making. Risk management requires security selection from a universe of securities that meet a known set of qualitative standards.

The Market Cycle Investment Management methodology helps to minimize financial risk:

  • It creates an intellectual “fire wall” that precludes you from investing in excessively speculative products and processes.
  • It focuses your decision making with clear rules for security selection, purchase price criteria, and profit-taking guidelines.
  • Cost based asset allocation keeps you goal focused while constantly increasing your base income.
  • It keeps poor diversification from creeping into your portfolio and eliminates unproductive assets in a rational manner.

Strategic Investment Mixology – Creating The Holy Grail Cocktail

Steve Selengut

So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails“, lists three things that mixologists consider important to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit but does not overpower it; and 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions; and 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that: new cocktails are the result of experimentation and curiosity; they reflect the moods of society; and they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history — with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, the “Old Tom Martini” is here to stay!

It’s likely that many of the products, derivatives, funds, and fairy tales that emanate from Modern Portfolio Theory (MPT) were thrown together over “ti many martunies” at Bobby Van’s or Cipriani’s, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes.

The financial products of the day are themselves, created by the mood of society. The “Wizards” experiment tirelessly; the customers’ search for the Holy Grail cocktail is never ending. Curiosity kills too many retirement “cats”.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after- tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

Understanding Investment Securities: Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve both financial and market risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

Planning Securities Decisions: There are three basic decision processes that require guideline development and procedural disciplines: what to buy and when; when to sell and what; and what to hold on to and why.

Market Cycle Investment Management: Most portfolio market values are influenced by the semi-predictable movements of several inter-related cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

Performance Evaluation: Historically, Peak-to-Peak analysis was most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

Information Filtering: It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set. There is too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps.

The problem is that mass produced concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one that must be replaced with something less “modern-portfolio-theoryesque”:

1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy.

2) Using indices and averages as benchmarks for evaluating your performance ignores both the asset allocation of your portfolio and the purpose of the securities you’ve selected.

3) Using the calendar year as a measuring device reduces the investment process to short-term speculation, ignores financial cycles, increases emotional volatility in markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ —most of the time.

4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

And the one ingredient to replace: Modern Portfolio Theory (the heartbeat of ETF cocktails) with the much more realistic Working Capital Model (operating system of Market Cycle Investment Management).

Cheers!

Stock Market Corrections Are Beautiful… When

Steve Selengut

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators over-react to news of any kind because that’s what speculators do. Thus, if any brief little market hiccup becomes considerably more serious, new investment opportunities will become abundant!

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price— Investment Grade Value Stocks. I start shopping at 20% below the 52-week high water mark— the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.

4. Take a look at the future. Nope, you can’t tell when the rally will resume or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time— as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor’s Creed (look it up). You should be out of cash while the market is still correcting— it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on Investment Grade Value Stocks; it’s just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago—

9. Examine your portfolio’s performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it is based upon your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed portfolio.

Unfortunately, only Self Directed 401k and IRA programs are able to use Market Cycle Investment Management.

10. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the courage to get rid of them during rallies— also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Short ones (those that last a few days, weeks, or months) are nearly impossible to deal with using Mutual Funds.

So if you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight.

Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction—

Think cycle instead of year, and smile more often.

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