Tuesday, December 16, 2008

Diversification Balderdash

I recently read the December’s Investment Advisor magazine and found most investment advisors were touting their use of diversification to reduce the risk of their client accounts. Do people really buy into this rhetoric?

The issue was filled with articles and pretty pie charts explaining the benefits of diversification until the very last page where the article, “The Failure of Asset Allocation” appears. This article reveals the truth: Having a diversified portfolio has not protected investors from this bear market.

With the exception of U.S. Treasury Bonds, all major asset classes have lost value in 2008. Equity REITs and REIT mortgages were supposed to be a diversifier, but they are down 37% plus. Foreign stocks and emerging markets were supposed to diversify away some of the equity market risk exposure, but they are down 46-56% respectively. TIPs and high yield bonds were supposed to help “diversify” fixed income allocations, yet relative to plain garden variety intermediate government bonds they have underperformed by 18-27% respectively. Commodities were another “asset class” tossed into the theoretical diversification bucket, but they are down 26%.

Holding all of these asset classes was supposed to protect client assets by lowering portfolio risk. It didn’t, and it won’t. As the market recovers, the securities will become uncorrelated once again placing a drag on portfolios.

I prefer to place bigger bets on individual areas and as I perform research for a follow-up on ETF trading, I’m finding it pays to run our rotation model on the asset classes, making sure to include both long and short choices, to see where portfolios should be concentrated. By including securities such as long dollar and short dollar, we can be sure that there truly is “always a bull market somewhere.”

David Vomund
http://www.etfportfolios.net/

Monday, November 3, 2008

Radio Intervew

Here is a 15 minute interview with the Big Money Show in Denver, Colorado. The recording took place November 3:

www.etftradingstrategies.com/interview.mp3

David Vomund
www.etfportfolios.net

Wednesday, October 15, 2008

Emotions of Investing

In case you think individual investors suffer the emotional roller coaster of investing more than professional managers, think again. The same “thrill of victory and agony of defeat” forces are at work with everyone.

We believe active market timing is a tough and losing game. If we start day-trading performance will suffer. The Style Index portfolios program is designed to be almost always invested, unless there is an unusually difficult market environment. This is an unusually difficult environment.

We moved our Style Index clients to 100% cash on September 8. That doesn’t mean the stress stops there as being left behind in a rising market is one of the biggest mistakes retail investors make.

On Monday the 13th, while the rest of America celebrated a record breaking 936 point advance, we stressfully stared at quotes wondering if we should get invested. We stood with our conviction and stayed in cash. Overnight futures were up more that night (translation….another sleepless night!). The next day the market opened three hundred points higher. It didn’t help that my wife wondered why I hadn’t started buying yet!

That was the high and the market plunged back down to its lows shortly thereafter. Clients appreciated remaining in cash and they likely figured we had it figured out all along. Fortunately they didn’t see our nail biting as the market advanced!

We’ve handled trading differently with the Tactical Allocation program. Instead of moving to all cash, we’ve temporarily been running a long/short program. We are long some of the outperforming sectors, such as regional banks and health, while maintaining an equivalent position in a short S&P 500 ETF.

Eventually the market will become less erratic and we’ll return to investing for growth, but for now safety is prudent. Still, that doesn’t mean it’s easy….

David Vomund
www.etfportfolios.net

Monday, September 29, 2008

Sell Your ETNs

Last February Lehman introduced several exchange-traded notes (ETNs) under the “Opta” brand name. Unlike exchange-traded funds (ETFs), which represent actual share holdings, ETNs are backed by the credit of the issuing bank. That didn’t seem like a big deal a few months ago, but it does today. The Lehman ETNs no longer exist.

Morgan Stanley has four currency ETNs. This firm moved to traditional banking status allowing them to more easily borrow from the Fed in an emergency, but the risk of default remains.

Barclay’s is a big player in ETNs and they are the most financially strong, but in today’s climate that can change fast. AIG was considered in good standing just two weeks before their failure.
The ETN market is much smaller than the ETF market. With today’s credit crunch, the ETN market may get smaller still. I see no reason to subject portfolios to the credit risk of ETNs.

David Vomund
http://www.etfportfolios.net/

Wednesday, September 17, 2008

Investing is akin to driving. You start and point A and want to get to point B, but you don’t go there in a straight line. When the road turns, you turn with it.

The same goes with the market. Earlier this year TheStreet.com interviewed me asking for my favorite ETFs. At the time commodities were rising so I chose an inverse bond fund and an energy fund. The inflation road turned as commodities plunged. Inflation is less worrisome so an inverse bond fund is no longer appropriate.

Commodities have sold off but so have equities. So much for the theory of diversification helping an investor avoid draw-downs. The panic of the 2008 credit crisis is underway and people are re-evaluating their portfolios. Unfortunately the time to make portfolio decisions is not during a crisis. More on that in an upcoming blog. In the meantime, here is a short interview in today’s Tahoe Bonanza:

http://www.tahoebonanza.com/article/20080917/NEWS/809169965/1050&ParentProfile=

David Vomund

Monday, August 18, 2008

Bears


The bears are attacking. No, I’m not talking about the stock market. Instead I’m referring to life in the mountains at Lake Tahoe. While watching the Olympics, a bear began to rip open our dining room’s screen door. Fortunately my daughter was in the kitchen and alerted us. It is bad enough for bears to be in control during market hours, but now they are making their presence known on weekends as well!

On another note, we were quoted in Investor’s Business Daily:


David Vomund

Wednesday, August 6, 2008

Investing in the Energy Solution

The price of oil has fallen these last few weeks but energy costs remain high, and some (including myself) believe the downtrend is temporary. Before discussing how an investor can profit in alternative energy, it is important to understand the energy problem. People blame high prices on speculators, OPEC, oil companies, the weak dollar and taxes. These may all play a role but when you step back to view the forest instead of the trees it’s all about supply and demand.

The demand story is well told. For all the attention paid to China and India (and rightly so), rising demand in Saudi Arabia and across the middle east is nearly as important. Since 2004, Saudi oil consumption has increased nearly 23%. Saudi Arabia and other oil exporters will meet their own demand before they attempt to meet the world’s demand.

The supply story is seldom told, but is the crux of the problem. The bottom line: The world’s big oil fields are producing less, sometimes alarmingly so. The most striking is in Mexico where output from the country’s once-mighty Cantarell field has plunged by a third in less than a year. The depletion rate of the world’s biggest oil fields is estimated as around 4.5% to 8% per year.

Despite the potential for profit in today’s high prices, crude oil production (just crude, not natural gas liquids) topped out in May, 2005, and that may stand as the peak that Matthew Simmons, author of Twilight in the Desert, and other “peak oil” experts have predicted was imminent.

High energy prices have turned the focus to alternative energy solutions. The success of the Toyota Prius, which still can’t be produced fast enough to meet demand, demonstrates the profit potential in energy solutions. Texas oilman T. Boone Pickens is turning his focus to wind power, funding the world’s largest wind energy plant. Innovation has never been greater in wind, solar, hydrogen, and other alternative energy methods. This is the upside to high energy prices.

Investors can participate and profit in the booming alternative energy market, but picking individual companies to buy is scary. If you purchased Pets.com in the 1990s because you believed in the power of the internet, then your investment was a bust. It’s disappointing to be right on the sector and wrong on the stock.

With exchange-traded funds (ETFs), investors can buy a security that holds a basket of stocks within a particular sector. For example, if you want to invest in solar energy, you can purchase the Claymore Solar Energy ETF (ticker TAN). This ETF holds the largest publicly traded solar companies in the U.S., China, Germany, and other countries. If you want to invest in wind energy companies, you can purchase the newly traded First Trust Wind Energy ETF (ticker FAN).

A more diversified choice is the popular PowerShares Clean Energy ETF (ticker PBW). This ETF holds the leading companies involved in renewable energy and technologies that facilitate cleaner energy.

These exchange-traded funds can be bought or sold just like a stock. They allow investors to participate in the alternative energy sector, a sector that is becoming increasingly important as our country becomes more energy independent.

David Vomund
http://www.etfportfolios.net/

Monday, June 23, 2008

Independence versus Hedge Funds

My last blog covered the advantage of independent advisors over those associated with the big-name firms. With the recent news on hedge funds and the sub-prime mess, it is a good time to explain the advantage of independent advisors over hedge funds.

Hedge funds pool client funds. For that reason, clients rely on the hedge funds to provide them information on what their investments are worth. This information is provided either monthly or quarterly, and you trust the fund for its accuracy. There are many cases where portfolio values were fudged, making clients believe their portfolio values were higher than reality. This deception can only go so long.

In my small town of Incline Village a fund gathered millions and failed to report to investors its portfolio losses. Eventually the managers and sales team fled town, and investors lost their money.

Last Thursday the FBI arrested Bear Stearns hedge fund managers for fraud. In an email one manager wrote, “Believe it or not … I’ve been able to convince people to add more money …”

With independent advisors, the brokerage account is yours. You simply give the advisor authority to place trades on the account. I trade through Fidelity Investments so clients can monitor performance daily at Fidelity.com. There is no pooling of assets.

Thursday, June 5, 2008

Independence Versus the Big Firms

I have several friends that are brokers with large firms. Although we are all investment advisors, my friends work very differently. While they are with large firms, I’m a registered investment advisor (RIA) with my own firm. From my perspective, clients are far better off with independent RIAs like myself.

There is a commercial from a major brokerage outfit that says, “Our clients always come first.” Unfortunately that isn’t the case. Large public companies are responsible to their shareholders. As a result, decisions are made to maximize profits to keep shareholders happy. Revenue generation is the top priority so there can be a conflict of interest between placing client money in the best area versus placing client money into areas that generate the most income for the broker and the firm.

For independent fee-only RIAs, there is no conflict between serving the shareholders or the client. There isn’t the lure of receiving extra compensation when placing client funds in certain investment vehicles. We receive no commission from trading and there are no production quotas. We are only paid based on the value of client portfolios. It is in our interest to do what is best for the client.

Saturday, May 3, 2008

Remembering David Martin

A subscriber to my weekly VIS Alert.com newsletter, David Martin, unfortunately passed away last week from a freak shark attack.

http://today.msnbc.msn.com/id/24325640/

I met David Martin at AIQ’s fall seminars. He was a fan of my ETF rotation approach and used it in his own portfolio. At his last seminar we agreed that the following year we would go mountain biking after the seminar. Unfortunately that ride never happened. He seemed 20 years younger than his real age, always saw the glass as half full, and will be missed. Our prayers are for his family during this difficult time.

Tuesday, April 29, 2008

AAPTA Seminar


A week ago I spoke at the American Association of Professional Technical Analysts (AAPTA) seminar in San Francisco. While my wife and children enjoyed the sights and sounds of the city, I was able to visit with some of the top technicians in the country.

The AAPTA organization was founded in 2004 and has around 130 members. This organization allows professional technicians to engage in networking and thought provoking dialog.

My session covered the strategies found in my ETF Trading Strategies Revealed book. Since Paul Desmond of Lowry’s Research was the next speaker, I was honored to be the warm up act! It is a bit intimidating speaking to this group but I quickly settled in when I humorously described what you hear on financial TV and what it really means. It goes like this:

"We have great values in our portfolio." translation - Our stocks have been massacred.

"The market sold off on technical factors." translation - We have no idea why the market went down.

"We are short term cautious but long term optimistic." translation - We want to be right no matter what happens.

Although the S&P 500 is near an important 1400 resistance area, I can unfortunately report that Linda Raschke and Paul Desmond remain bearish (both turned bearish at much higher levels). Stan Erlich was more constructive, however, pointing to a developing head-and-shoulders bottom pattern.

I had the pleasure of meeting Tom and Sherman McClellan. Surprisingly Tom knew me from my past appearances on a Los Angeles financial TV show. Tom is extremely knowledgeable on the financial markets. Another highlight was talking to Nelson Freeburg, author of Formula Research. I’ve always admired his detailed quantitative testing.

This was a good time and I look forward to next year’s event.

Thursday, March 27, 2008

More on ETNs

After posting our March 10 blog on Exchange Traded Notes (ETNs), a reader posted a question regarding the advantage of ETNs over Exchange Traded Funds (ETFs). In truth, there are only small advantages and disadvantages to each form of security and as a shareholder you likely won’t notice any difference between the two.

The advantage of ETNs is that they eliminate tracking error between the security and the index that it follows. ETFs have some, albeit small, movement away from their underlying indexes. For buy-and-hold investors there may be a tax advantage in ETNs as you can defer capital gains and income until the day you sell your investment. Then again if you need income distributions then ETFs have the advantage.

The disadvantage of ETNs is that they are secured by senior debt notes. Although a company like Barclays with $1.5 trillion in assets is very dependable, it will never be as safe as a central bank. If Barclays and other ETN issuers are forced to close their doors then we’ll have more problems than our ETN holdings!

I treat ETFs and ETNs the same. If I’m looking to trade a commodity and an ETN choice has more liquidity, then that is where I’ll go. There is a good web site called ETNCenter.com with lots of good information on ETNs.

David Vomund
www.ETFportfolios.net

Tuesday, March 18, 2008

Market Stress


Today the Dow rose 300 points even before the Federal Reserve announced it will lower interest rates. A couple days ago stocks were falling because of a run on Bear Stearns. Without emergency Fed intervention, there may have been other runs on investment banks.

The market is volatile, and people’s portfolios are in the red. How does a portfolio manager react to these events? I reach for my Investor Anxiety Reliever pills (more accurately known as jelly beans!).


High emotions lead to bad trading decisions. Market lows occur when people, including myself, want to throw in the towel and sell everything. Instead of liquidating it would be better to buy more, but that is hard to do. Just think how many people were bullish when the Dow was at 14,000 compared to now when the Dow is 2000 points lower. It’s backwards.


This is a bear market but we finally know that the parts of the government that count (the Federal Reserve and the Treasury Department) are now engaged. The market will get through this, just like it did with the Savings & Loans crisis, but in the meantime it isn’t fun. Those who bet on worst-case outcomes will be wrong (again).


In the meantime, the market will be volatile (wow, what a bold prediction!). The more you trade the worse off you may be. So sit back, have some Investor Anxiety Pills, and look for a better second half of the year!

Monday, March 10, 2008

Exchange Traded Notes

The general public is gaining awareness of exchange-traded funds (ETFs), but few have heard of exchange-traded notes (ETNs). That will likely change.

ETNs are similar to ETFs, but they take a different approach. Whereas ETF buyers own shares which represent a stake in a portfolio that holds a basket of assets, ETNs are long-term debt securities issues by the ETN parent company. They promise to pay investors the return of a particular index, minus fees. The good news is ETNs will track the market index. The bad news is it places credit risk on the investors.

To this point only iPath (of Barclays Global Investors) has offered ETNs. These have become popular because they track commodities, a hot area of the market. A few days ago, however, Lehman Brothers announced they are introducing a line of ETNs. Goldman Sachs is also a player. This almost insures that ETNs is where the market is going. Keep watch on this development and you heard it here first!

David Vomund
http://www.etfportfolios.net/

Friday, February 29, 2008

NPR Interview

In January Sacramento’s National Public Ratio channel (KXJZ) contacted me for an interview for their Insight program. This was a thrill because this is a program that I often listen to. Insight’s moderator, Jeffrey Callison, is top-notch.

When the interview was scheduled, we planned on a discussion of the exchange-traded fund (ETF) rotation strategy covered in my book, ETF Trading Strategies Revealed. As I drove to the interview on January 23 the market was plunging nearly 4% followed by a reversal that I wasn’t aware of at the time. Timing is everything!

The shaky market was in the headlines so the interview turned into a discussion of the volatile market and how investors should respond. It turns out that morning was the market’s low point.
I didn’t talk to Mr. Callison before the interview so I didn’t know the questions, but the 15 minute session went well. At least I think it went well because I can’t listen to it….I hate the sound of my voice!

He surprised me with a question referring the wealthy people in my home town of Incline Village (sometimes called “Income Village”). Even Sacramento knows of my town’s reputation!

Here is a link to the interview. Depending on your internet speed, it may take a minute to download:

NPR Interview

David Vomund
http://www.etfportfolios.net/