Our take on the Federal Reserve’s intent to continuing quantitative easing expressed today is sobering. The market did not like it (the Dow at this writing is down .4, NASDAQ is down .6 and the S&P is down .5%. The Fed is blaming the government shutdown, the sequester, and the shutdown characterizing all of that as “restraining economic growth.” Duh. The problem is the apparent head fake that is emanating from market performance. For the year, the markets have been stout, but if you have forayed into the world of individual equities eschewing the averages in order to garner higher returns, you may have been clobbered. The percentage moves in individual equities sometimes borders on the staggering. It is not at all unusual for a stock to go up 25% in a month and give it back in a day depending on the vagaries of Wall Street expectations. We can certainly understand the comfort provided by an “average” return when the market is up over 20%. The problem thus becomes what do you do when you are trying to be “better than average?” The answer to that lies on the downside. Let’s flip it around for a moment. Suppose the market was down over 20% for the year or worse like 2008; who wants to be there especially when you recognize that to get those losses back you have to double the loss. In order to get back to even, a 20% loss has to feature a 40% gain, and that performance is not possible playing the averages except over a longer period of time. We remain committed to participating in the market during market uptrends. The question then becomes positioning. How many ETF’s do you own versus individual equities? And, are you prepared to stomach a significant loss on an individual position? We think the answer lies in the buffer. Do the ETF’s provide enough of a buffer to shelter a violent decline in an individual position? Now, we have to talk about time frames and percentages of the positions. For example, if you have 75% of a total portfolio in ETF’s and 2.5% in ten individual stocks, how is the performance affected if 4 of the 10 stocks go down 10%? That, folks, is the art of the deal. In an ideal world, the ETF’s get the market return and all of the stocks advance (my lips to God’s ears). The much harder part is the discipline involved in being either in or out of stocks altogether including the ETF’s. That strategy will only be blessed if the market moves precipitously down. I would posit the question to every money manager out there whether professional or individual; how do you outperform the market owning only the market? Food for thought. This and/or the accompanying information was prepared by or obtained from sources which DFE believes to be reliable but does not guarantee its accuracy. Any opinions expressed or implied herein are not necessarily the same as those of DFE and are subject to change without notice. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instruments or to participate in any trading strategy. The investments or strategy discussed may not be suitable for all investors. Past performance does not guarantee future results. Sale of option contracts can be risky and may not be suitable for all investors.
Posted on: Wed, 30 Oct 2013 19:47:39 +0000
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