Monday, May 11, 2009

More on Dynamic Asset Allocation & The Use of Volatility As one Tool Among Many to Manage Asset Mix and Securities within Asset Categories

 One aspect of RB planning is the humor in it, at least for old codger LBs.  An example from this past weekend is there was no rehearsal at the rehearsal dinner, or for that matter any discussion about what anyone was supposed to do the next day.   Consequently, on the  day of the wedding, certain members of the Tribe were hitting golf balls at the range when a call is received wanting to know why they were not yet at the wedding.  Yes, that was the first notification. So both head home to quickly take a shower and change clothes, Tyler rushes out the door and his mother says Ty, blue socks do not match khaki slacks, another call is received asking where are you, why are you not here yet, and they hop into the vehicle fortunately armed with a Garmin, since they need to call in about ten minutes to find the where the heck was the location of the soon to be wedding.

I recently added a Gateway Post for my discussion of Dynamic Asset Allocation.    Time for a Paradigm Shift in Asset Allocation Theory: Need Dynamism, Better Assessment of All Forms of Risk, and Due Regard to Volatility Patterns   I added some discussion at the end of it.  This approach is not static but flexible, requiring change in the asset allocation mix based on events unrelated to the individual investor.  The tools used to implement this method are constantly updated.  By far, the most important new tool is the use of Volatility to alter the mix among asset classes and even to manage individual security risk particularly in a bear market.  The formulation of the VIX Asset Allocation Model in 2007 was by the far the most important addition to my Dynamic Asset Allocation approach since I started to practice it in early adulthood.  This is the Gateway Post for my discussion on the Vix Model guide for shifting into and out of an allocation to stocks.   USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS 

Another important aspect of volatility is to use it to manage risk for particular security positions especially in a secular bear market.  One of the favorite topics in my blog, judging from the interest shown in the FeedJit widget to the right, is ING preferred stock issues.  Oddly, of the more than 300 securities that I own, the ING preferred stocks have probably been the most volatile.  I recently added a Gateway Post just for this minor position that contains links showing how I managed the risk of just ING preferred stocks since October 2008, to the point of now holding my lowest cost shares, realizing several profitable trades and dividends along the way. ING Preferred Stocks: Links in one Post Managing Risk for Each Security in the Asset allocationThose large number of blogs are important only because they show in real time how I used volatility to  manage risk for one security, and to do so in a manner that ultimately proved rewarding.   Similar type discussions have been made with other types of sub-asset classes such as perpetual equity preferred issues including cumulative equity preferred securities issued by Real Estate Investment Trusts.  Trading Rule for Disfavored Asset Class: Sold BDNPRC and Late Buy of Just 30 PicoManaging Risk for Each Security in the Asset allocationThose securities have also been volatile.  So using volatility to manage risk is part of Dynamic Asset Allocation, which focuses not only just on broad movement between asset classes but also on volatility of securities within an asset class, usually small asset classes with enhanced levels of risk to them.   Though some of the important management of risk has occurred within a significant sector of a major class, such as Trust Certificates that are part of my bond allocation, and those securities showed highly unusual volatility characteristics in the 4th quarter of last year.  Trust Certificate Links in One Post

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