Restructuring and Rebalancing as of Close of June 1, 2012

It’s been some time since I tended this blog.  My apologies.

As you know, as of close of October 26, 2011 the Standard Portfolio has been, as usual, equally invested in stocks of Dow Jones 30 Industrials (DIA), long term U.S. treasury bonds (TLT), natural resources represented by gold (GLD) and money market instruments (SHY).  As of June 1, 2012, this portfolio has appreciated 1.85%, which compares to the market represented by Dow which has decreased by 0.84%.

The second portfolio, called the Trading Portfolio, has appreciated 3.23%.  This, compared to the Dow losing 0.84% is even stronger performance.  This outperformance was achieved because the portfolio was more positive on stocks, having moved into Nasdaq 100 on October 26 close.  SHY in the portfolio was substituted by QQQ, for that purpose, raising the stock commitment to 50% instead of the regular 25%.

In net effect, both portfolios have seen positive absolute results which are better than the stock market as represented by the Dow.  This is achieved with much less volatility than the market, which is an additional beneficial feature of both portfolios.

It is time to review the portfolios and the market dynamics going forward.  To say that markets have been very volatile in the period covered from last October would be an understatement.  Stocks had a huge rally which has dissipated as at this point and even drifted into a slight negative territory.  DIA, representing the Dow, as we saw, has lost net of 0.84% during this period.  Bonds were weak but picked up and had a terrific rally.  TLT, representing the long term U.S. treasury bonds, has appreciated by14.18% in this time period.  Gold started a correction and has lost 5.91% during this period, as represented by GLD.  Money market, measured by SHY, is up by 0.04%, which is typical of its steadiness.

As far as stocks are concerned the prognosis going forward does not appear good.  As of close of June 1 stocks have lost about ten per cent from their recent high.  Their correction is now experiencing the key level of their 200-day moving average.  This may act as support, at least temporarily.  It won’t be surprising to see stocks bounce for a while.  But, domestically and globallly speaking, economic conditions do not look promising for the next few months any way.

Stocks generally discount economic conditions for the next six to nine months.  Everyone thinks about stocks when talking about financial markets.  But bonds, though not as glamorous as stocks, represent about three times larger market than stocks.  Much smart money is invested in bonds and their discounting mechanism is even smarter than that of bonds.  Stocks did well for several months but, having come down by ten percent in about a month, they now indicate soft economy for the months ahead.  But bonds having gone up by similar or even greater amout, which is more substantial for them, have been indicating weak economy for a longer while.  Stocks have just awakened to the weakness in the economy prospectively.  True, bonds are “safer” and their safe haven status accounts for some of their outperformance.  But that by far is not the whole story though some say so.

Some even say that bonds are in an unsustainable bubble.  That itself is unsustainable even though bonds may consolidate or even correct prospectively.  As we have seen in the previous posts dealing with the structure of our portfolios, investment money can travel only in four continents: equities, bonds, natural resources and money markets.  These four represent the entire world of investment almost exclusively.  So, if the investment money, old or new, is moving out of stocks it has to go somewhere.  With investors seeing weak economy it won’t go to the commodities which, on the contrary, have also come down heavily because of the weak economic prospects.  Hence, bonds are the choice area left.  Gold too has a safe haven status and now seems to have turned from its recent correction.  Of course the ultimate safe haven is money market instruments and most typically the three-month U.S. treasury bills.  Remember 2008 when global economy was about to collapse, everything came down as investors piled up in T-bills even though they returned zero per cent in interest.  But such total panic is very rare.

Europe does not look good.  At best we can look forward to the proverbial can being effectively kicked down even further for the next few months.  Austerity won’t bring down the deficits when economy is weakening and on top it is quite unpopular.  If another round of quantitative easing or stimulus is started, bonds and gold will again benefit, along with a temporary boost for stocks.

So, being invested in all four major areas of investment, both our portfolios are prudently situated.  We may not make a quick killing but we are likely to continue making good steady returns.  We will, therefore, leave the standard portfolio alone as equally invested in DIA, TLT, GLD and SHY.  We will rebalance it as of close of June 1. 2012 to bring the alotment back to equal proportions of the four asset types.  For example, we will sell some bonds in order to bring them back to 25% and buy some gold to boost it back to 25%.  New investors can simply buy 25% each of DIA, TLT, GLD and SHY as far as the Standard Portfolio is concerned.

As to the Trading Portfolio let us try something less conservative and yet prudent enough not to cross concerns safety and volatililty.  We will liquidate all four holdings.  So, sell all holdings in DIA, TLT, GLD and QQQ.  Instead, we will buy five stocks in equal proportion of 20% each.  The five stocks are Abbot Labs (ABT), Church & Dwight (CHD), Consolidated Edison (ED), Southern Company (SO) and Newmont Mining (NEM).  All five are defensive issues with very low volatility compared to stock market as a whole.  They are likely to go down less in case stocks enter a bear market.  Abbot Labs is a solid company in the health care industry.  It represents the growth area within the world of stocks.  Church & Dwight, involved in cleaning chemicals, represents the staples sector in the same area.  Con Ed and Southern Co are utilities and a bond substitute.  Newmont Mining represents natural resources, being a large gold mining company.  Besides being defensive all five have greatly outperformed the market over the last ten years.  On top they will together yield about 3.25 per cent in dividends.

Good luck in your attempts to achieve financial freedom.  Do not forget to add and maintain a solid spiritual dimension of your choice in your life.

Posted in Investing Journal

Singleton Funds

There are investors who are interested to invest just in one fund in order to create a solid, diversified, stable and balanced portfolio that we advocate at this website. Well, there are two such investments available. One is an old no-load mutual fund called Permanent Portfolio (Symbol: PRPFX). The other is a new ETF (Exchange Traded Fund) started just this month, called Global X Permanent ETF (Symbol: PERM). Both are excellent vehicles. If you are investing every month or quarter the same amount of dollars, you can choose any of these two funds for that purpose. This way of investing is called DCA which stands for dollar cost averaging. Or, you can choose to buy PRPFX or PERM in lump sums. Or, you can buy, say, 25% of your investment now and invest the rest on a monthly or quarterly basis. Another form of averaging would be to invest when price has come down by three to five percent from a recent high. These funds are quite stable and do not come down much. For example, even in the free fall of 2008 when everything came down including stocks which suffered loss of about 45%, PRPFX was down only about 8%. So, use discretion, as always.

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Brief reflection

Last time we made changes in our two portfolios was as of the close of markets on October 26, 2011. We rebalanced both portfolios as of that date. Let us think of the portfolios as at $10,000 each on October 26 for the sake of simplicity and look at the performance since then. As of market close on January 30, 2012 the standard or default portfolio stands at $10,213.56 with a gain of 2.14%. The trading portfolio stands at $10,350.04 with a gain of 3.50%. By comparison, Dow, a popular measure of market, is up 3.43% for the same period.

Let us remember that both portfolios carry less risk than Dow and are, therefore safer. Standard portfolio is of course safer than the trading portfolio. So, the performance is quite comparable on a risk-adjusted basis.

Let us recount the contents and structure of the two portfolios briefly. Standard portfolio consists of four components in equal proportions: stocks (represented by the ETF with symbol DIA, popularly known as Diamonds), bonds (long-term U.S. treasury bonds represented by the ETF with symbol TLT), natural resources (represented by gold ETF with the symbol GLD) and money market (represented by the short term U.S. treasury notes ETF with the symbol SHY).

Trading portfolio has the same four components but it uses money market segment to augment additional positions in other asset types. So, on October 26, 2011 we moved 25% of SHY into QQQ which is the symbol for Nasdaq 100, raising our stocks position to 50%. Other positions are the same as standard portfolio. To specify, trading portfolio as of October 26 was equally invested in DIA, QQQ, GLD and TLT.

Those interested in the rationale of these positions in the two portfolios are referred to earlier posts, particularly the one dated September 5, 2011. We assume that the total investable money is equally divided between the two portfolios. The default portfolio is quite stable and does not change much except for rebalancing which is planned twice a year. The trading portfolio changes more often and carries little more risk. Anyway, both portfolios are less risky than putting all the money in stocks. We do not recommend individual stocks and use only broad asset types, for individual stocks bear company risk on top of market risk and sector risk. We also want to stay diversified in the four basic asset types: stocks, bonds, natural resources and money markets.  But please refer to earlier posts and study them in order to gain a detailed view of our approach to the markets.

Markets have been quite volatile.  Particularly, stocks have experienced heavy ups and downs since August of last year.  We came out of our pessimistic outlook on October 26 when we became more optimistic.  Both the realistic pessimism before October 26 and the rational optimism after have largely worked out for us so far.  As usual, there is always risk and you are encouraged to assess your personal situation and make appropriate investing decisions for yourself.

Bonds have done exceptionally well while gold has gone through a correction.  Both are likely to reverse but we are not changing our positions in either.  Economic reports in the last few months have turned positive and it seems the economy is turning around slowly and, more importantly, without artificial stimulus.  The latter bodes well for a measure of sustained optimism.

It is interesting to note that both of our portfolios do not show much sign of volatility.  Both have been remarkably steady, compared to the markets.  This is by design, as we play it safe but aim at doing reasonable well.  Our next rebalancing visit will be some time in early May, 2012.

So, happy investing! As usual, do not forget to secure a solid spiritual dimension, while working to secure financial freedom through investing.


Posted in Investing Journal

Rebalancing and portfolio change

This post is being done in a hurry. It is a good idea to rebalance from time to time. About twice a year would update and benefit the portfolios. As of yesterday’s close, that is October 26, we are rebalancing both portfolios, that is, buying and selling enough to bring all the four ingredients to 25% each. Also, in the trading portfolio, we are using the 25% allocation to money market, SHY, to invest in stocks by buying QQQ.

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Review, Harry Browne and Markets on Close of Friday, September 2, 2011

This is an important post.  We will take stock of the market situation and then delve into philosophy, strategy and tactics of investing.  Along with the discussion of strategy we also will compare our strategy with that of Harry Browne.  Please note that I am not using the word “we” in these posts as the editorial we but as the collective we where I want to include the reader as part of the discussion.  Indeed I never want to stand apart from the readers.  We are in this together.

First, let us take stcok. We are equally invested in two portfolios, called the Default Portfolio and the Trading Portfolio.  We simplified both the portfolios as of August 8, 2011. Both portfolios at present are identical, holding 25% each in stocks (DIA), bonds (TLT), natural resources (GLD) and money market (SHY) as of August 8.

The market as measured by Dow Jones Industrial Average has advanced 3.90% from August 8 to September 2. Compared to that both of our portfolios have advanced 5.05%. We have again beaten the market and are doing quite well. But, don’t expect this to happen every time. We do not want to get spoiled or raise unrealistic expectations. However, we need to see what helped our achievement thus far.

I remarked in the post on August 8 that both gold and bonds had a huge run-up and a correction won’t be surprising. Instead, both have continued to run up even more, with gold going up 9.64% and bonds 6.59% over the same period.

We must keep in mind that our goal is not just to beat stock market. If stocks go down 10% and we go down 8%, we would have beaten the market. But still we would have lost 8%. We got to obtain a decent return on absolute basis in addition to the basis relative to stocks. We are doing it so far. Unlike many analysts and market pundits we do not hide our performance in a black box or anything like it. We are completely transparent in both portfolios, openly taking positions and keeping clear what the positions are at all times.

We are well-diversified and balanced in both portfolios and hold each portfolio as an organic unit.  So, please do not think as if every item of investment is a separate investment.  Notice but do not dwell on the performance of each item.  Do not think, for example, that stocks are volatile and are not doing well, etc.  The entire portfolio should be added up every time you look at it so that we think always and only in terms of bottom line performance.  That is because the portfolio is not just a sum but an organism with limbs.

A bit of review of our strategy is in order. You can go back to previous posts for detailed narrative on the strategy. But a brief review can be useful to new readers.  In the following discussion I will add considerable detail and reasoning about the philosophy of investing employed here.

I had heard of Harry Browne and his Permanent Portfolio. You can look both up in Google. But I had the occasion to look at Browne’s strategy in some depth recently. It is remarkably close to my strategy. There are some differences though. Browne brilliantly came to construct a permanent portfolio based on an ingenious application of Modern Portfolio Theory. He chose four asset classes on the basis of their inherent non-correlation. This makes his choices very effective as a package and does so on a relatively permanent basis. His package called Permanent Portfolio holds aggressive stocks, long term treasury bonds, gold and cash in equal proportions. My Default Portfolio comes close but it was not based on inherent non-correlations only.  It is based rather on a theoretical synoptic view of logically possible types of investing. I came to view investing as exhausting itself through two types: lending and owning. Lending is further divided into short term and long term. Short term is money market and long term is bonds. Alternatives in both are to be explored and one can invest in strongest of them on the basis of risk quality and change this periodically depending on rotating sub-sector strengths.  Owning is also divided but its division is not on time basis which makes sense with regard to lending but not with respect to owning. The division in owning is on the basis of whether one owns actual things or paper certificates of ownership such as shares in corporations. I called the former natural resources and the latter are of course the equities which represent legal ownership but with nothing physical to show. The natural resources of course are physical. I submit that these four asset types, namely, stocks, bonds, natural resources and money market isntruments, are logically exhaustive and therefore quite determinative. They are also distinct from each other.

When economy is growing, stocks do especially well. Economy at all times faces two dangers: inflation and recession. Natural resources protect against inflation because they increase in value if economy hits inflation. On the other hand bonds protect against recession because they do well when economy suffers recession. So our Default Portfolio is designed to do well in all three conditions of the economy. The 25% allocation in money market instruments defends the portfolio against volatility and serves as a general purpose hedge in a rare case when there is a total panic where everything goes down as what happened in 2008, for example. It also helps, as in the case of Browne’s Permanent Portfolio, in taking advantage of opportunities in other investment types.

The main tactic with Harry Browne is rebalancing the Permanent Portfolio when anything goes up beyond 35% or goes down below 15%. On the other hand it will be my tactic to rebalance twice a year at the time when annual seasonality changes course. This happens at the beginning of May and end of October.

Again, Browne recommended investing only in aggressive stocks, though later in his life he came to advocate market index, specially Standard and Poor’s 500 (SPY). My strategy would be to combine in equal proportions large cap and small cap stocks. And even this is variable, with an investor choosing strong or undervalued sectors, for example.

My allocation to natural resources is open to not just gold, as is the case with Browne. It is open to all metals, agricultural commodities, energy and real estate. But I agree with Browne that gold is the premier natural resource and I would not quarrel with a permanent filling of natural resources allocation with nothing but gold.  In fact Browne does not have a whole category called natural resources as I have.  He just has gold as an independent category.

In my recent exploration of Browne’s investment philosophy I found something great to learn from Browne and his followers. The latter have now compiled historical performance of the Permanent Portfolio. If you access it by Googling it, you can see its record from 1970 (the year when gold started trading freely) to date. The record is incredibly strong.  The performance is very steady, with remarkably little volatility and has yielded competitively with stocks about 9% with much less risk than stocks.

Why gold? What about those who have been burnt in gold during the eighties and nineties? They don’t want to touch it with a ten foot pole. Then there are academic economists who regard it as a barbarous relic and cannot stop calling it names. At the other extreme there are gold bugs who regard gold as real money and have no faith in paper currencies of any country. Gold is regarded as a hedge against inflation specially in developed nations of the West. This is the fear trade of gold. But now things have changed. We have powerful economies of emerging countries where people are getting richer and love to indulge in possessing gold which has become a status symbol. This is the love trade which has almost dislodged the fear trade from the prime position. Safe haven aspect of gold is well-known too. Gold has been outperforming even the Swiss Franc lately, a currency that is regarded as among the strongest. But then a reason why Swiss Franc is traditionally stronger than most currencies is that it is backed by gold more than other currencies!  Supply of gold is not about to increase dramatically.  Demand is increasing, along with prosperity in emerging nations.  September, for example is very strong in India for gold demand.  China and India account for about fifty per cent of gold consumption demand globally.  Add to it the fact that many central banks across the world have instituted buy programs in gold.

An interesting aspect of historical performance over the last forty years of Browne’s Permanent Portfolio is that it has never gone down more than 6.2% (in 1981) in any year. Compare that with stocks which have suffered losses up to 40 or 50 per cent in some years, with devastating effect. Incredibly, the Permanent Portfolio eked out a small gain even in 2008 when everything caved.

It is observed that when one or two assets go down substantially the third goes up dramatically making up more than the losses in both. Remember, because my four categories are logically exhaustive, money cannot go anywhere outside these four classes, and it has to go somewhere. More often two asset types will go up when one goes down. Of course money market investment remains steady never going down and going up only modestly, acting as a buffer and big protection. This is how even 25% gold position throughout the eighties and nineties did not matter because, guess what, both stocks and bonds went up dramatically, more than making up for losses in gold.

Browne was very insistent that there is no way to predict what markets will do and so one should always maintain positions in all the four categories.  I agree this has a grain of truth but it should not be held as a dogma either.  There certainly exist anomalies that can be taken advantage of in investing.  Also, individual investors can benefit from the lack of nimbleness of large institutional investors.

One of the most important aspects of our investment strategy is that we should never break the two portfolios into their constituents and think of our investment as if it is an investment in particular stocks, bonds or natural resources.  That would be disastrous.  Each portfolio is an organic unity and we should always think of its performance in terms of the bottom line which is the sum of all investment values every day and every week.  For example, if you have problems bringing yourself to invest in gold, think that you are not investing in gold as a separate item of investment.  Indeed that can be ruinous.  Gold here, or for that matter stocks, bonds and money market, support and complement each other and are held as one unit.  Each portfolio stands on its own.  You can start the Default Portfolio any time or any day but it should start as involving all its items in the proportions required.  Then it moves as one body and not one limb at a time.

Needless to say, there are no changes in our positions or allocations at this time.  I will come up with a post when we have a change.  Keep looking after mid-October.

I believe this brief review has not only recapitulated my investment philosophy detailed in previous posts but added to them in terms of discussing the total philosophy of investment strategy. Looking at Browne’s philosophy in this regard has helped me crystallize my ideas greatly. I hope you find all this helpful in your attempt to achieve financial freedom for yourself. Let me remind you as always to add and strengthen a significant spritual dimension to your economic efforts. Best wishes!


Posted in Investing Journal

Market on Close of August 8, 2011

It’s been a while that I have commented on the market.  There was not much to add to what I had said in the last few blogs.  I was cautious and recommended caution on our trading portfolio.  Our default portfolio was of course invested in a diversified and balanced form.  Market exhibited strength for a long time and the overdue correction set in in full force only from the start of August, 2011.

On Monday, August 8, 2011 market closed at levels not expected by many, way low.  It does not appear, though, that the downtrend is over.  Market is oversold at this point and a rally can get under way any time.  However, rally won’t last very long and downturn may resume.

Let us look at our performance.  Our default portfolio was set on July 31, 2010 with $10,000 equally divided among stocks, bonds, natural resources and money market.  Our benchmark, S&P 500, was then at 1,101.60.  S&P 500 closed on Monday, August 8, 2011 at 1,119.46, with an increase of 1.62%.  Our default portfolio closed at $10,908.65 with an increase of 9.09%.  Not bad, right?!

Our trading portfolio was last set on October 29, 2010 very cautiously at 10% in stocks, bonds and natural resources each and the balance of 70% safely in money market.  It was then valued at $10,441.53, when S&P 500 was at 1,183.26.  This Monday S&P 500 closed at 1,119.46 with a decline of 5.39%.  The trading portfolio closed on Monday at $10,716.65 with an increase of 2.63%.  Again, not bad.

So, both portfolios have beaten the market.  But where do we go from here?

We are going to rearrange and simplify both portfolios.  Default portfolio, which is at $10,908.65, will be equally divided among the four classes of investments as follows: 25% in stocks represented by the ETF whose symbol is DIA, popularly called Diamonds, comprising the thirty stocks in the Dow Jones Industrial Average.  Another 25% will go to bonds, represented by the ETF with the symbol TLT which stands for long term US Treasury Bonds.  Next 25% will be invested in natural resources represented by the ETF with the symbol GLD, representing gold bullion.  The final 25% will go to the safe money market represented by the ETF with the symbol SHY which holds US Treasury Notes of around two years duration.

We will extend the same simplified pattern to the trading portfolio also.  Its current value, $10,716.65, will be invested equally divided among the same four asset classes.

A word or two about the reasoning behind this move.  Besides simplicity, the new allocation shows more confidence in stocks primarily because stocks have now corrected to a level that is somewhat more sustainable than the overvalued levels that prevailed till end of April, 2011.  Bonds and gold both have done very well lately.  Both are hedges against each other and also against the stocks.  So, we have a good balance and diversification.  We are not fully invested in these three asset classes, for we still have 25% safely parked in SHY which is our avenue for money market instruments.  If stocks exhibit further weakness in the coming weeks or months we can move these reserves into stocks too.  Bonds and gold deserve correction from their current lofty heights but both would do that only if stocks advance.  Unless, of course, we have a free fall like in 2008 where everything came down.  2008 experience was unique in many ways.  We cannot rule it out but we cannot also plan on an encore.  If, however, there is a free fall we can use our cash reserves of 25% to take advantage of the opportunity such as there will be.

So, all the best wishes for a solid achievement of financial health and freedom!


Posted in Investing Journal

Week Ending February 11, 2011

It’s been a while since the last post.  But things have not changed to warrant alterations in our investment stance.  Really, no change in our positioning and strategy seems needed.  Yes, stocks have gone against our cautious stance and now for a while.  But, bonds and gold have corrected.  In fact, bonds are quite oversold.  Gold corrected and has begun to bounce up again.

A veteran commenter, Richard Russell by name, has observed that U.S. stocks seem to have become the new global safe haven for stock investors.  This is a strange development.  Usually, gold, treasuries and U.S. dollar are the candidates for safe haven status.  Another interpretation is that U.S. stocks are being inflated to be the next bubble. It is dangerous to be deeply involved in bubbles at a late stage.  Global stock markets except U.S. and Europe have broken down.  Especially, emerging markets like Brazil, China and India, not to speak of Indonesia, Thailand, Turkey, etc., topped out last November and are down significantly since then.  It is anybody’s guess as to how long will the U.S. and Europe bourses will keep levitating.

Sentiment is overly bullish and insiders have been selling heavily.  We do not want to get more deeply involved in U.S. stocks than we are at this point.  We will hold all our current positions.

To recount, in the default portfolio we are equally invested in stocks, bonds, natural resources and money market.  In the trading portfolio, we are ten per cent invested in stocks, bonds and natural resources each and the rest (70%) in money markets.  For details see the previous posts.  Of course we may be missing opportunities in stocks which do not show any signs of correction.  But, given their significantly overbought status, we will rather err on the side of caution.

Good luck with your investing and pursuit of financial health and freedom.  Do not forget to stay in a solid spiritual dimension of your choice at the same time.

Posted in Investing Journal