Tuesday, April 7, 2009

More Comments on VEU and Dynamic Asset Allocation/

I view most of my writing in these posts as journalism that goes beyond financial journalism.  It is my view that individual investors need  to read original source material, including filings at the SEC, earning reports, transcripts of conference calls (as a substitute for listening to them), and other original source material.  I will also read the releases from governmental agencies that collect data relevant to my investment decisions such as the Bureau of Labor Statistics and non-governmental agencies such as the Institute of Supply Management. News organizations like the AP do a barely passable job describing those releases. Sometimes those organizations mainly just summarize the headline of the original news source and a couple of facts. I always find data in the original material that is not even summarized that is useful to me in making decisions. This is just part of what I call the investing process that all individual investors need to follow to improve their odds of better returns and to limit losses.   the investment process/links to further information on canadian energy or royalty trusts

Yesterday, I bought VEU, a Vanguard index ETF for world stocks outside the U.S.  When I make this kind of purchase during a secular bear market, I know that my timing may be off.  We could start another leg down to new lows at anytime, or the bottom could have already been established in early March. I do not know what the immediate future will bring, and neither does anyone else.  I can only say that I simply "suspect" that 6500 or so in DJIA was the low for this bear market.  Consequently, I am now starting to plan for the next bull market.  Based on prior experience during bear markets almost as severe as this one, I know that success in the stock market is based on buying in the depth of despair, not years into a bull market when everyone is giddy. The purchase of VEU yesterday was a small part of that plan.  My timing was off when I sold VEU in May 2007 having bought it shortly after it started to trade on the exchange.  The shares proceeded to rise another $10 or so to over 62 in October 2007.  So was that sale a mistake?

It was the right decision from my point of view, as I was becoming increasing concerned about events occurring in the real world that had nothing to do with me or my needs or any other consideration or input of static asset allocation theory. When I try to implement a much more difficult dynamic asset allocation plan, which requires changing my allocation scheme based on my perceptions of events happening in the real world,  I know that I may be early or late, which is unavoidable.  The key for me is to avoid a static allocation scheme that almost requires riding down a position from $62 to $29.  Now, for the long haul, meaning several years, I have started a position in a core holding at a price significantly less than my last purchase, and that is important to me. In my view of dynamic asset allocation, I am not attempting to catch a short term swing up or down, but to better position myself for a longer term holding in an asset class that may last several years.   To implement this kind of plan, cash has to be raised during a bull bear market to reinvest at lower prices during the bear market, so I have developed techniques and indicators to assist me in making those timing decisions.   

The positioning in long term investment grade corporate bonds last quarter was new for me. While I have done a limited amount of trading to reduce risk and to lower my effective cost, selling JZV and the Aon TCs several times as an example, the core part of my position acquired at opportunistic prices will be held for years.  I am not looking for a short term trade but I will manage the overall position short term to reduce my effective cost.  Similarly, my move into floaters and REIT cumulative preferred issues did not occur in any meaningful way until the prices reached a level last quarter that the long term potential and reward of those sub-asset classes became appealing to me in juxtaposition to their risks. Similarly, the opposite of waiting to buy until after a substantial fall in price has a corollary in selling during a parabolic move upward in price. I am not going to try and justify a move in oil from $30 to $150 a barrel, or the kind of move in Nasdaq stocks in 1999, or real estate prices in 2002-2006 in a number of localities. If I hold an asset that is undergoing a parabolic move, I will just try and figure out when to sell it, rather than trying to buy and then sell to what some call the greater fool.
These topics are frequently discussed by me throughout these posts. See, e.g.:

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