Following our March 2009 Portfolio Review, global stock markets continued to rise while U.S. Treasury bonds continued to show weakness.
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NOTE: For ease of comparison, returns for all InVivo model portfolios are based on a “fully invested”, UNHEDGED position with regular re-weighting and does not include gains from our September 24, 2008 call to go to cash and our March 16, 2009 call to return to the market. The 12-month average annual total return for AGTHX, CWGIX, FCNTX is a hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total returns smooth out variation in performance. They are not the same as actual year-by-year results, according to Fidelity Investments.
The death of buy and hold continued to be a big theme for investors.
- For Investors, Short Term Is Now a Long-Term Strategy
“You can’t be a trader because that’s too dangerous, and you can’t be a buy and hold, because things we thought were absolutely safe are broken,” says Michael Kresh, president of M.D. Kresh Financial Advisers in Islandia, N.Y. “You have to be somewhere in between. You have to be a conscientious long-term investor, somebody who is making decisions and designing portfolios not on day-to-day actions but on trends.” - Bye-Bye To Buy And Hold
“The definition of buy-and-hold tends to be a little fuzzy,” says John Buckingham, chief investment officer at value-based Al Frank Asset Management in Laguna Beach, Calif. “A lot of people think that means you buy something and do nothing for years on end. That’s not a strategy we’ve ever implemented.” Yet Buckingham would include himself in the buy-and-hold camp – sort of. Buckingham describes his firm’s strategy as “buy and harvest,” a term that he says entails a long-term investment horizon but with the flexibility to be “following the money.” “The strategy is sound–buying undervalued stocks and selling overvalued stocks,” he says. “Unfortunately, some people will confuse that with buy-and-forget as opposed to buy-and-continue-to-monitor.”
That’s all find and well, but value is relative, so it seems. What do you think of Davis on the Reported Death of Buy and Hold?
If buy and hold is dead, is trading the only alternative for investors and advisers? Consider this: it’s been tough for the best hedge fund manager (Jim Simons) and the best endowment manager (David Swensen).
At this point in history, there is unprecedented correlation of most asset classes. Investors and traders are all buying and selling the same things at the same time, making for big up days and big down days with little rhyme or reason. Our strategy of diversify and hedge is an excellent way to manage risk in today’s market.
Does Anyone Buy and Hold?
The answer is, of course, NO. Were mutual fund managers simply holding? No, they were busy picking stocks. Were pension fund managers simply holding? No, they were doing their thing. Were hedge fund managers simply holding? No, they kept trying to beat the market and most of them lost. Warren Buffett didn’t buy and hold, and he had a terrible year.
KEY POINT: IT’S WHAT AND HOW MUCH YOU HOLD, NOT (SO MUCH) HOW LONG YOU HOLD IT.
The bottom line is that the performance of any given manager is driven by the performance of their particular investment universe: the rising tide lifts all boats while the ebbing tide strands them en masse. Mutual fund and pension managers invested in stocks fell with (or more than) the S&P. Those specializing in commodities boomed and then busted. Hedge fund managers witnessed their classic convertible bond arbitrage strategies collapse with financial stocks and bonds.
For more, please refer to my conversation with David Fry of ETFdigest.com.
Diversify and Hedge
The only people that got away were the diversified and the hedged. If there was a lesson to be learned by the average investor from the debacle of 2008, it would be that “buy and hold” is a catchphrase, a marketing slogan that means nothing.
Think of it as active vs. passive management. Active management attempts to outperform the market with specific bets while passive management focuses on asset allocation and capital preservation. As I said to our premium members, the individual investor can do a bit of both:
Diversification among asset classes is the bedrock of our investment policy, i.e. our strategic asset allocation (SAA). In our model portfolios, each asset class is represented by a single ETF, one that also has a corresponding inverse ETF.
We also employ tactical asset allocation (TAA), i.e. how much weight is given to each asset class. Our TAA strategy adjusts the weight allocated to each asset class and changes over time (week-to-week for Satellite and month-to-month for Core) in response to market conditions.
A properly diversified portfolio will see the value of some asset classes rise while others fall and vice versa during normal market fluctuations. Periodic re-weighting the percent allocated to each asset class tends to do a better job of preserving profits and reducing losses compared to rebalancing a fixed allocation. In the event of a downward crash, we can expect all asset classes in a portfolio to go down in price together as investors sell everything to raise cash. The gist of hedging is to protect capital in meltdown conditions.
Hedging allows the investor to be out of the market for a short time without having to engage in market timing. Hedging (especially with futures) tends to be cheaper than selling all or part of an investment portfolio and can help avoid taxes that would be triggered upon a sale.
Inverse ETFs are useful for individual investors who wish to put on a crude hedge during times of excessive market stress.
Hedge Ratios Published Daily
We now publish the hedge ratios for inverse ETFs that correspond to the long ETFs found in our U.S. Core and Satellite model portfolios. The data can be found in the PORTFOLIO STRATEGY section.
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