Last week's Trader's Corner discussed the only silver lining I could find to the market action over the last year: the ability to compare one's portfolio performance against several other sample portfolios.
As that November 7, 2008 article noted, the NYSE lost 44.63 percent from the close of the week of October 8, 2007 to the close of the week of October 6, 2008. Using the NYSE's performance during that year-long period as a benchmark, the article compared several sample portfolios taken from such sources as Smart Money and articles by Paul Farrell of MarketWatch, Scott Burns of the Dallas Morning News, neurologist Dr. William Bernstein who studies modern portfolio theory, and money manager Bill Schulteis. I calculated losses from 22.27 percent to 40.57 percent in those portfolios during the benchmark period. All those portfolios outperformed the NYSE and some specific funds in the portfolio outperformed by a considerable amount, but some did not perform as well as I would have liked.
As I mentioned in that article, I'm not a financial advisor and so was not suggesting investments in these particular portfolios. Moreover, the proponents of those portfolios might long since have adjusted recommendations since they had been originated. I located them in a blog from Blueprint for Financial Prosperity.
The purpose of the comparisons and the resultant article was to further my own studies and also to encourage subscribers to think about their portfolio allocations. Since most bear markets include at least a few strong bear-market rallies of at least 20 percent, subscribers who had done their homework could use any such rally to reallocate if market action over the last year proved that they had taken on more risk than was acceptable. Some subscribers would want to consult a professional for help.While I know enough about technical analysis and read widely enough that I took steps to go to cash in most investments in October, 2007, I know far less about portfolio allocation. While my husband and I weren't incurring losses while the markets dove, that's only half the story. We'll have to be as wise with the next phase, recommitting our money. A year's worth of study during the downturn has turned up only a few investments that strongly pique my interest and fewer professionals that I trust to help guide me in any selections that I might make. It has at least turned up a few of interest, however. If you're just starting out looking for ways to reinvest or if your study has already located a few interesting ideas, what's next? In the October, 2008 AARP Bulletin, Sid Kirchheimer warns against looking for investments at "free lunch" seminars ("Scam Alert," 26). We options traders are often willing to pony up a good bit of money for an educational workshop touting the latest style of trading, and a free one sounds even better, doesn't it? Not always so, Kirchheimer warns. If not scams, many of those presentations are sales presentations relabeled as "educational workshops," Kirchheimer writes, so be careful about responding to newspaper ads or targeted mailings unless you know caliber of the person presenting the workshop. As I write, I'm lamenting the fact that I can't attend a free weekend workshop offered in Dallas this weekend. My personal broker, Michael Cavanaugh of BrokersXpress, will be speaking. I know him, I've checked his credentials before choosing him as a broker and I've done some shameless quizzing, too. I've learned that not only does he know as much as I do about options to discuss the strategies that interest me: he knows far more. He can offer suggestions that might not have occurred to me. So, I want to listen to what he has to say.
But what if you don't have such first-hand knowledge of a presenter or other investment professional? You can do what I did, and what Kirchheimer and Dave Kansas, author of The Wall Street Journal. Complete Money & Investing Guidebook, suggest doing. Start with a search of the SEC's website. Kirchheimer suggests that you start with Questions You Should Ask about Your Investments, and both Kirchheimer and Kansas want you to navigate through the site to Check Out Brokers and Investment Advisers. For example, checking out my broker reveals that there have been no "events" disclosed about him. I'm not surprised.
I'll be studying the SEC's suggested questions to ask about investments, too. For a year, I've been watching the performance of the Hussman funds, and I've lately been studying performance information about Cavanaugh's "Discretionary Option Spread Strategy" with Cavanaugh as the Portfolio Manager. While those sample portfolios that I discussed in last weekend's article had lost from 22.27 percent to 40.57 percent over that year-long period, a 40/60 stock fund/bond fund split perhaps appropriate for a retired person in Hussman's two funds (HGSFX and HSTRX) would have lost only 3.76 percent for that same period. A 60/40 split more appropriate for a younger couple not near retirement would have lost more, about 5.3 percent. Both combinations still well outperformed the NYSE. (As of November 12, 2008, both those funds were below their close the week of October 6, 2008, however, and, in one case, well below.)
Although I do not have exact numbers from the close of the week of October 8, 2007 to October 6, 2008 to use for comparison on the Discretionary Option Spread Strategy Cavanaugh manages, his presentation materials' year-to-date performance figures show a loss of only 7.19 percent for the period through to the publication of the materials. Cavanaugh's performance should probably best be compared to the Russell 2000's, however, as his particular strategy "takes a market neutral approach to the equity indices using listed options traded on various U.S. market exchanges . . . primarily the Russell 2000 index, or RUT," according to his materials. During the same period Cavanaugh reported a 7.19 percent YTD loss, the benchmark RUT had much heftier 31.57 percent loss according to Cavanaugh.
I've been reading John Hussman's weekly reports for more than a year at this link and I know I like what he has to say about the markets. Long ago, he advised those who could not endure at least a 30 percent drop to get out then, as a drop was due, and I like that he advised people to get out before the market drop, not after as some have done. I know my own experiences with Michael Cavanaugh, president of Know Your Options, have shown him to be intelligent, experienced and caring, but what else do I need to know before investing my money with either? I'll be asking a whole lot of those questions that the SEC suggests I ask, including questions about fees, the investment's liquidity, the types of securities the investment holds, the risk profile.
Because my husband is retired, I'll be asking a question that the SEC curiously does not list: what are the tax implications of this investment? For example, John Hussman used the rise in commodities earlier in the year, selling into that rise in one of the funds. That proved to be a nice contrarian move that captured most of the profits and also protected the fund from the losses that others heavily invested in commodities endured when they go out too late. Will that fund's investors, even those who invested after the profits were taken, have to take a capital gain hit this year due to the gains made on the original commodity exposure? Kansas' book, The Wall Street Journal. Complete Money & Investing Guidebook does a little better job of discussing the various tax questions one might ask of an investment professional.
I'll be checking Morningstar's website, too, something that Kansas also suggests doing. Although I likely won't find information on Morningstar about Cavanaugh's managed portfolio, I have already ascertained that Morningstar accords Hussman's Strategic Growth Fund four stars, for example, and that its expense ration is 1.1, putting it among a Morningstar list of "Low-Cost Long-Short Funds."
As I always do, I remind subscribers that I'm not an investment advisor. I'm not pumping these investments. I have no investments in either yet, and may or may not in the future. The purpose of this article has been to invite you along as I explore my own choices, encouraging you to employ some of the sources I've listed in your own investigations. We market participants have unfortunately and sometimes rather forcefully been taught lately that we can't be passive participants in the investment process. We need to understand our risks. Only we, after study and consultation with a trusted professional, can determine whether those risks are appropriate for us.
Don't expect quick answers from me about my decisions, all wrapped up in an article next week. I tend to be slow to make decisions, and I don't yet feel rushed by all the cries of "the bottom is in." I do feel that it's time to wrap up this topic, however, so "the bottom is in" with the topic for now, and we'll probably move back into technical analysis next weekend.