Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Red Emperor-BREAKING NEWS
19
Feb 2013
Red Emperor – Somalian Minister of Natural Resources Abdirizak Omar Mohamed has just set up his new oil team
http://www.directorstalk.com/red-emperor-somalian-minister-of-natural-resources-abdirizak-omar-mohamed-has-just-set-up-his-new-oil-team/
19
Feb 2013
Red Emperor – Somalian Minister of Natural Resources Abdirizak Omar Mohamed has just set up his new oil team
http://www.directorstalk.com/red-emperor-somalian-minister-of-natural-resources-abdirizak-omar-mohamed-has-just-set-up-his-new-oil-team/
18
Feb 2013
Broker Fox Davies Talks Gulf Keystone Petroleum (BUY, 350p)
http://www.directorstalk.com/broker-fox-davies-talks-gulf-keystone-petroleum-buy-350p/
ExxonMobil report net-profit increase
http://tradingresearchpoint.co.uk/category/stocks/
Gulf Keystone Petroleum – More reserves found at Iraqi Kurdistan oil block
4th Feb
http://www.directorstalk.com/?s=GULF+KEYSTONE
VIDEO TALK
VSA Capital still likes Africa & Kurdistan for oil stocks
http://www.directorstalk.com/category/video-talk/
Hi, I'm new to the site and just wanted to introduce myself. I'm Penny and would appreciate any words of advice. Thanks!
Thanks Clive,
I have been looking at Mebane Faber for a short while. TAA for the masses however is a new one.
My aim is to build wealth with low drawdowns MF seems to be a good way of doing this.
Bill
Sorry 1889, I hardly ever visit this board any more, so very late in responding.
No just check the 10 month moving average once each month
http://www.taa4themasses.com/
http://www.mebanefaber.com/timing-model/
are useful links.
Ladder is a form of log stochastic measure, so the easiest way its just to calculate
1 - ( ( log(current) - log(bottom) ) / ( log(top) - log(bottom) )
i.e. if I opt to track the Dow and decide a top price of 15000 at which I'd be all-out and a bottom price of 6000 when I'd be all-in, and the current price is 10,000 then
( log(10000) - log(6000) ) / ( log(15000) - log(6000) )
= 0.56 (56%)
If later the Dow moved to 12000 then = 0.76 (76%)
These figures indicate cash reserve amounts, so if the fund size was $100,000 you go from 56% cash reserve ($56K) to 76% cash reserve ($76K) as the Dow moved from 10,000 to 12,000 i.e. you'd have sold $20K of stock across that move.
You can also use the calculation against yields rather than price, but you have to invert the result i.e. deduct the results from 1.0 i.e. perhaps you might be tracking Bond yields and want to add as the yields rose, reduce as the yields declined.
I'm not using Ladder with Mebane's approach, but I am with respect to weighting between long dated and short dated treasuries and with yields so low that's indicating all in ST's at the present time.
Ladder's nothing more than a method to help you weight investments, but can throw off some nice rebalance gains during rapidly zigzagging conditions. It scales you in as prices decline and out as prices rise (form of buy low, sell high).
Best. Clive.
Andrew Knight & Henderson Morley – A Disgraceful tale.
sharecrazy.com/beta/daily/4224/andrew-knight-henderson-morley-a-disgraceful-tale
Ladders
Clive,
I have been following your posts on this and other boards about ladders. Is there a chance you can post a link where I can download an example?
Do you use ladders in conjunction with your PP Mebane Fabers portfolio or do yoy only rebalance and check the 10 month moving average daily?
Thanks in advance.
Bill
Hi lostcowboy
I was reading the 4th Edition of Brian Millard's Stocks and shares. In chapter 9 page 132-146.
He discusses and compares 3 installment methods. Constant purchase of number of shares, Dollar cost averaging and advanced dollar cost averaging. something similar to twinvest.Uses cost per share rather than twinvest number. the latter did the best.
Is there a indicator such as beta that indicates what it is best for dca, twinvest or synchrovest program.
Is there anyone synchrovesting? I just started an experimental program
Best wishes
infooverload
As I am a beginner I am going to digest the information.
Thank you for answering and explaining your answer.
The bottom line from my experience infooverload is that within limits and subject to amounts traded it doesn't matter where you level trade points.
The limits are that if set to narrow then trading costs eat into the rewards from trading. Set too wide and the levels are never reached.
If you trade at say 1% moves you will have lots of trades, but trade very small amounts, as such trading costs might amount to more than the actual gains achieved.
If you trade at say 50% moves then you'll trade larger amounts and make larger gains per cycle, trading costs will be relatively small to the gains achieved, but you'll trade relatively infrequently.
There is a temptation to trade at 1 standard deviation amounts because graphs of the Bollinger bands (e.g. +/- 1 stdev) look like they are good at predicting, but in practice they are no different to trading at other deviations.
There are optimal bands that if traded produce the best results, however predicting those bands beforehand is as difficult as predicting future stock prices.
As such an investor who trades at say fixed 30% bands will likely compare to another investor who attempts to predict turning points etc. Accordingly trading the simplest approach is sufficient.
It's generally better to focus upon diversification and/or price appreciation potential rather than the technicalities of when to trade.
Many investments achieve comparable longer term rewards, of which bonds tend to be the most stable. Others such as commodities, stocks, REIT's etc. tend to track that reference over the longer term, but periodically encounter bubbles and subsequent bubble bursts. What most investors do however is invest after the bubble has inflated which means that they overpay for the stock. After the bubble bursts the declines can result in investment returns that underperform even cash, potentially over extended periods of time.
Much less frequently are assets truly cheap, but may be perceived as being so following a bubble burst event (when generally the asset has declined from over-priced to more fairly priced).
The best holdings in my opinion are a diverse range of stocks (domestic and foreign), bonds, gold, REIT, commodities and cash. When you hold such a collection in around equal capital value amounts and rebalance periodically whenever any one bubbles then you take profit out of the over-priced and distribute the proceeds across multiple others (in effect lock in the gain).
Such diversity also helps ensure that if you overpay for any one initially, then the subsequent decline in that one of many assets as its bubble bursts is much less than had that asset been held exclusively.
Rebalancing periodically is a must. If you hold through thick and thin then the profit take opportunities are missed. A reasonable choice of rebalance method is a mechanical one as that is more likely to be followed than if left to human emotion based trading.
Increasingly I have personally simplified my investment style having tried ever possible trading and/or prediction method I could think of. My preference now is to achieve market returns with low drawdowns and as such I'm attracted to Harry Browne's Permanent Portfolio ( http://crawlingroad.com/blog/ ) and Mebane Faber's Quantitative Asset Allocation methods ( http://www.mebanefaber.com/timing-model/ )
Rather than using one or the other alone, again I've looked to diversify and use a intermixed form of 50/50 blend of both PP and Mebane's.
But I've opted to use a bond ladder (spanning 6 years/steps) ( http://www.financialwebring.org/gummystuff/bonds-4.htm ) as an alternative to 30 year (PP) or 10 year (Mebane's) choice of Bond holdings as I believe bonds to be in a relative bubble (JMHO).
I've therefore moved away from AIM like band trading to monthly reviews 40% bands (i.e. 12.5% initial allocations and rebalance whenever any one component exceeds or declines +/- 5% above/below that (7.5% and 17.5% rebalance trigger points).
The Mebane method does additionally trade according to current price relative to its 10 month moving average (similar to 200 day moving average), by reviewing each month and being in when the current is above the moving average or otherwise out for that month if below. For my part I only trade the Foreign (BRIC), Commodities (DBC) and REIT (IPRP) in this manner.
If the next 30 years have as low drawdowns as that for the Mebane and PP figures previously shown that will likely see me out whilst providing investment comfort along the way.
Best. Clive.
PS another link you might be interested in is a UK PP http://www.fool.co.uk/news/investing/investing-strategy/2009/06/29/feeling-cautious-load-up-on-gold.aspx
Thank you lostcowboy plus others for your information.
macro-aim uses cross over of 2 averages to have a trade . This cross over initiates aim advisement on buy and sell. This buy/sell event is just one event coinciding with a cross over,or is it as many as aim will allow as long as there is no further cross over.Of course , it will be a series of buys or a series of sells not both till a new cross over occurs.
Hi infooverload, I think that one of the averages is used as the mean/average and the other average is used as a substitute for the raw price.
About using the standard deviation, you may want to check out some of the early postings of Myst he came up with the idea of using a deviation from the mean in a AIM like manner.
Check out his forum, http://investorshub.advfn.com/boards/board.aspx?board_id=1074
Thank you for your answer. I am a beginner so please bear with me.
I base this idea on a book called channel and cycles by B. J. Millard.
Prices fluctuate around a mean. They imitate a bell shaped curve. When prices are above or below a mean/moving average of +/- 1 standard deviation they exclude 68%of the price events near the mean on either side. 32% of the time they are greater than +/-
i Standard deviation. .32 x 12 months=3.84 or about 4 . Would not this be a good way to treat prices as a probability of where they are from the mean. To use their position in relation to the mean as a price trigger. Rather than a cross over of two averages?
Are the any Macro-Aim spreadsheets I could use or download? Are there any posts or written articles on it?
70.86% cash reserve indicated
Current Price :
UK FT100 5266.7
I am surprised British investors aren't supporting this resource your board. As an investor I appreciate your efforts in maintaining the board and posting amount of percentage of cash to have on hand.
I read a book a while ago Brian Millard. His background in spectroscopy led him, as a chemist, to filtering stock prices for cyclic behavior. Which aim investors are really seeking a orderly progression from high to low and back again. He drew channels around the stocks. Those channels predicted with some high probability when stocks were in buying and selling ranges and ready for reversals. Wouldn't a Standard deviation of deviation of stock prices from an average above a certain probability indicate a turn , a trading opportunity. Perhaps choosing one standard deviation above or below as an example would include 68% of a stocks behavior, or maybe 2 standard deviations which might be too high a criteria or some compromise amount give the aim investor a better chance of success than some arbitrary safe value.In other words choose a probability model of prices.
There is a MACRO-AIM version of AIM InfoOverload - the work of Don Carlson many moons ago. MACRO stands for Moving Average Crossover.
With MACRO-AIM you only trade when the 200day EMA (actually I think its more correctly something like 207 day EMA) is crossed. That way you might combine (postpone) several trades into a single larger and later trade (potentially buying and selling more at the troughs and peaks rather than cost averaging smaller trades during the run-up to those peaks and troughs).
Best. Clive.
Hi InfoOverload
Of more recent I've started overlaying Mebane Faber's 10 month moving average indicator on top of AIM. So at each months review if the current price is above the 10m simple moving average then the stock is held as-is and AIM'd as normal. If however the current price is below the 10m sma then I sell the stock and leave AIM as-is until a later monthly review has the current price greater than the 10m sma. I'll then repurchase the stock again together with any updates (typically buys) that AIM additional indicates.
I wrote to Mebane and discussed how the 10 month moving average (comparable to 200 day moving average) is very similar to the stop-loss style that I've used for over a decade. Generally - on average - prices sit 7% either side of the moving average. Which also is close to 1 standard deviation distance.
In general I would suspect therefore that trading at 1 standard deviations would generally produce 14% hold zone ranges.
Your 4 trades a year figure implies a 6% step (12% hold zone range). If you're trading 10% of stock value and with stock value around half the total value (assuming 50/50 stock/cash) then you'd be making 5% stock value x 12% hold zone range = 0.6% x 2 round trips (4 trades) = 1.2% p.a. on average in volatility capture. That's pretty reasonable IMO.
I have revived my long ago basic proram on aim investing. .I ran some numbers by hand . I believe Mr. lichello's fortuitous circumstance led him to his 50% cash 50% initial investment. His 10,8,5,4,ETC. pattern is near optimal for this allocagtion of resources. In the real world has anyone ever used 1 Standard deviation + - from a mean figure as a trigger point for a trade. This would supply approximatey 4 trades a year if checkups are done once a month.
RE: CARRY TRADES
Gold, Long dated Bonds, Stocks et al are all relatively highly priced.
With near zero UK and US base rates carry trades would appear to be being widely employed, selling the dollar to buy any form of risky assets.
As the dollar declines that adds to the gains of the carry trades.
But when the dollar reverses they'll be lots of selling on all fronts (stocks, bonds, gold) to cover the highly leveraged shorts.
69.3% cash reserve indicated
Current Price :
UK FT100 5107
66.7% cash reserve indicated
Current Prices :
US Dow 9762
UK FT100 5080
UK FTAS 2599
69.5% cash reserve indicated (unchanged)
69.5% cash reserve indicated
67.2% cash reserve indicated (unchanged)
67.2% cash reserve indicated
One aspect of potentially using Permanent Portfolio that troubles me somewhat is that it might be a case of data mining.
Here is one of the most optimal 1972 to 2008 investment blends, comprised of Emerging Markets, Gold and LT Bonds
Perhaps that implies that in the forward time direction that relative out-performer of past might be tomorrows relative under-performer.
LT Bonds have been on a long term mean reversion following excessively low prices in the mid 1974, rising up to present day near 0% current base rate highs and as such may prove to be one of the poorer performers in the forward time as base rates start to rise again.
Gold price was de-fixed in 1971, leading to exceptional performance in the the 1970's.
Gold does serve as a domestic currency risk counter, but that can be easily achieved by holding non-domestic currency based stock investments. It's easier for US investors as when their currency slides the rest of us slide down with it, so in import/export terms (purchasing power) there's little change.
Stocks are an inflation hedge. Yes existing investors suffer as prices crash down to reflect forward time inflation pacing growth and higher yields, however if you've cash to buy stock at the lower price or took steps to protect against downside price slides, then stocks can still serve investors who owned stock prior to the declines.
Gold and LT Bonds seem a bit of a risky play, supposedly riskier stocks might be the safer approach, especially if we're about to enter (or are in) inflationary or sideways ranging market conditions and we're using AIM-like investment methods.
When many see a performance graph such as the first one shown above the reaction can be a temptation to buy into that in expectation of future performance matching the historic performance. More often that turns out to be a buy-high event. Better perhaps to look for relative under-performers, and buy into those instead. Accordingly I'm seriously thinking about ditching the concept of using PP as part of my defensive ('cash') set.
An alternative to Permanent Portfolio might be to use a 50/50 Stock/Bond blend that's 50/50 blended with PP. Overall that results in 37.5% each of stock and LT Bonds, and 12.5% in each of cash and gold.
Run stocks, bonds, gold and cash through the optimiser http://www.riskcog.com/portfolio.jsp#5b009ac5f82re and out pops
which is more aligned to a 50/50 S/B blend combined 50/50 with a PP
A principle reason why I use 12 overlapping year long stop-loss positions instead of yearly positions can be seen if you run yearly backtests against the Dow (1929 to 2009) as shown below - the result is too many 'dry' years.
By starting a new stop-loss position, once each month, each with a stop-loss set at 5% and a time-stop set to 12 months and using 1/12th of the 'cash' reserves available at the time is that you don't encounter as many 'dry' years when using monthly positions. You're better time diversified and more likely to have bought into at least one month at or near that years lows.
In concept if dividends = cash = 5% then each such position will at worse end the year with the same amount as at the start of the year as dividends and/or cash interest replenishes the 5% stop loss.
If you assume cash/dividends at a constant 5% rate then the Dow's total annualised rises to 9.7% versus 8.9% for the stop-loss style. Yet over any one runs 12 month start to end date the worse decline is near break-even. So its a form of cash like risk (low downs) with reasonable investment reward that aids in minimising cash-drag.
More recently I've been evaluating extending the defensive part by blending in a Permanent Portfolio element. So far that looks to be a reasonable low-down, better than cash reward type alternative/addition. Presently therefore I intend to build up a PP position over time to around 50/50 levels of average 'cash' reserves (half of cash reserves in PP and half in the stop-loss style).
Stop Loss style yearly results
0.950 1929
0.950 1930
0.950 1931
0.950 1932
0.950 1933
0.950 1934
0.950 1935
1.238 1936
0.950 1937
0.950 1938
0.950 1939
0.950 1940
0.950 1941
0.950 1942
1.133 1943
1.121 1944
1.265 1945
0.950 1946
0.950 1947
0.950 1948
0.950 1949
1.176 1950
1.144 1951
0.950 1952
0.950 1953
1.440 1954
1.208 1955
0.950 1956
0.950 1957
1.340 1958
1.164 1959
0.950 1960
1.187 1961
0.950 1962
1.170 1963
1.146 1964
1.109 1965
0.950 1966
1.152 1967
0.950 1968
0.950 1969
0.950 1970
0.950 1971
1.149 1972
0.950 1973
0.950 1974
1.377 1975
1.179 1976
0.950 1977
0.950 1978
1.042 1979
0.950 1980
0.950 1981
0.950 1982
1.203 1983
0.950 1984
1.277 1985
1.227 1986
0.950 1987
0.950 1988
1.270 1989
0.950 1990
0.950 1991
1.042 1992
1.137 1993
0.950 1994
1.335 1995
1.260 1996
1.226 1997
0.950 1998
1.248 1999
0.950 2000
0.950 2001
0.950 2002
0.950 2003
0.950 2004
0.950 2005
1.162 2006
1.064 2007
0.950 2008
0.950 2009
19.886 Stop-Loss Gain Factor
32.440 Index Gain
1.038 SL p.a
1.044 Idx p.a.
67% is leaning on the high risk button just a bit, whatcha think?
From the low cash reserves of 12% indicated back in March 09 (message 135) when the FT100 was at 3500 levels, to current indicated 67% cash against a FT100 of 5100 (nearly 46% up from that March low) - it's saying a bit too much - too quickly.
That is further highlighted by the RV's (as shown in iBox) PE component which at 17.6 (red bars in the chart) currently is a high relative to the 4 years of data shown in the RV graph. It would only take base rates to rise a bit to push the combined PE+BoE above the higher (white line) band into high risk territory (presently at 20.72)
If you consider the stock exposure side to be a martingale play e.g. add as share prices decline, reduce as share prices rise, whilst the 'cash' side is deployed in anti-martingale (let winners run, cut losers quickly, trend is your friend etc.), then the 67% in anti-martingale, 33% in martingale suggests a heavier bias towards continuing to run gains, but cutting losers quickly is more preferable to buying dips/pull-backs at the present time.
As the white lines re-converge again with the bottom value pulling upwards and maybe the top also extending upwards, as would occur during a Bull phase
so the risk profile would adjust to centralise indicated exposure/cash levels.
Another way to view it is the indicated stock exposure of 33% in aggressive (AIM stock part) and the 67% in defensive. If you kept 'cash' as cash then yes 67% is high. If you used for example Permanent Portfolio holdings as the defensive part then cash-drag is minimised. I personally use a stop-loss style for the defensive, within which all prior 12 runs (one started each month) up to March had been stopped out, but the ones running since March are doing well, but will cut out quickly should a turn around occur (I use stops set at 5% below the original purchase price).
To date, of the 7 stop-loss based runs (i.e. monthly positions) started since March 09 : March and June have been stopped out, April's is up 31%, May up 21%, July up 21%, August up 12% and Sept up 5%
Best. Clive.
Hi Clive,
67% is leaning on the high risk button just a bit, whatcha think?
66.9% cash reserve indicated
FT100 (4280) Yield 4.69% = 43.6% cash reserve indicated.
FT100 (4278) Yield 4.75% = 41% cash reserve indicated.
FT100 (4437) Yield 4.61% = 45.8% cash reserve indicated.
FT100 (4383) Yield 4.51% = 46% cash reserve indicated.
FT100 (4416) Yield 4.76% = 42.4% cash reserve indicated.
FT100 (4468) Yield 4.71% = 42.5% cash reserve indicated.
FT100 (4331) Yield 4.92% = 36.5% cash reserve indicated.
FT100 (4396) Yield 4.85% = 40% cash reserve indicated.
The 200dma has recently been breached (rising from below to above)
FT100 (4189) Yield 5.06% = 34.4% cash reserve indicated.
On a TA basis, the current FT All-Share is rising up and very near its 200 day moving average, increased volatility to either the up or downside might therefore reasonably be expected over the shorter term.
I've migrated to only applying the stop-loss style I use whenever the current price is above the 200dma, so have been mostly in cash for 'cash' reserves. A rise above the 200dma will re-initiate stop-loss based positions.
With conventional stock picking there are typically a few stocks that perform badly, a few that perform well and the rest are overall neutral.
If you discount time-value (inflation), typically you might see gain and loss distributions something like that as per the first chart in this next image
Generally after inflation is considered stock prices are a net zero sum gameplay (stock prices collectively rise with inflation).
Dividends might therefore be considered as the value-add benefit above inflation, or the risk-premium for taking on the downside risk of holding stocks.
AIM however sells out of risers, adds to losers and as such has a distribution more like that of the second chart (with classic AIM you never sell out of stock, so in that case the right hand edge would show more of an up than what is shown in that image).
As such it is more of a negative sum gameplay, however AIM has the additional benefit of volatility capture gains from trading stocks in a buy-low/sell-high like manner. Those gains are much more uniformly distributed across the whole range of stocks held and collectively will either counter, under-perform or out-perform the loss from the reduced right hand strong-gainer extremes.
With conventional stock picking you have a high probability of picking a mediocre stock and a low probability of picking a stock that either rises or declines significantly (although at times it would seem that picking large losers is alot more common that perhaps should be the case :)
In concept it's a needle in a haystack hunt. If you don't hold the few strong gainers within your overall stock set then you miss that benefit. Worse still if you hold the large losers but don't hold the best gainers then your results are significantly impacted.
Holdings funds or index trackers is one way to ensure you don't miss the strong gainers.
For AIM'ers however things are simpler as (volatility capture) benefits are distributed much more evenly. We're not playing the needle in a haystack game (although it does in part still hold) as small amounts of volatility capture across the whole compensates for AIM reducing holdings in strong gainers.
AIM's finite limit on how much additional stock is purchased when prices decline also helps the overall balance. And, unlike buy-and-holders, AIM is a part stock/part cash style, so that blend can be adjusted over time in reflection of perceptions as to the more likely future mid-term direction of stock prices (e.g. using vWave).
Typically with AIM you'll see less volatility overall which means both rising less during strong bull periods and declining less during bear periods. In turn that lower volatility adds some compound benefit value in a similar way to how a consistent 10% p.a. is better than alternations of 0% one year, 20% the next.
Classic AIM and AIM-LD (and Ladder) whilst very similar have the difference that LD typically captures more volatility (larger trading) benefits than classic AIM, at the cost of lower right hand type larger gains from a select few stocks.
All-told therefore, it's pretty difficult comparing the different styles as they are distinctly different and each will have its time in the forefront. In many respects therefore vWave serves as another form of AIM, that migrates you more away from the style that has more recently shown the stronger performance and towards the style that has shown the weaker performance. The dividend yield based Ladder shown in the iBox is somewhat similar to that of using the vWave.
FT100 yield 5.11% = 34% cash reserve indicated
If you AIM ETF's then you have greater protection against failures (which AIM dislikes), but providing you're diversified enough across a wide range of stocks with no one stock being too large then the odd failure is both to be expected and generally has a relatively low impact upon the whole. Likely those failures will be countered by other stocks that perform unusually well.
On the plus side of AIM'ing at that stock level is that you inherently create multi-way mini-ETF's that span a wide range of styles/class.
For example if I AIM'd two ETF's (to keep things simple) of Emerging Markets and Commodities then contained with both of those ETF's might be some value type holdings and some growth type holdings. Let's assume that there's 50/50 of each of value and growth in both of those ETF's.
If value stocks perform well and growth stocks poorly then that relative performance might not be sizeable enough to trigger a buy or sell within those two ETF based AIM's.
AIM'ing at the stock level however will more likely have some buying and selling activity occuring in reflection of value stocks rising in price/growth stocks declining in price, so you capture some AIM like volatility capture benefits from that particular growth/value relative price motion cycle.
In effect you can make a range of potential home-grown ETF's from a wide range of underline stock holdings, but you don't
actually have to physically create such virtual ETF's as when you AIM at the individual stock level the mechanics of those virtual ETF's is automatic and transparent.
The problem of course is that AIM requires sizeable amounts to be invested, typically $10K stock value per holding. Ladder
is one way in which that can be circumvented as it supports smaller amounts being invested per holding whilst still trading in an AIM like manner.
My guess is that at around a $750K fund value you could drop Ladder and just use AIM, having perhaps $10K stock value in each of 50 individually AIM'd stocks with each having $5K cash reserve. That way any one failing stock loses an acceptably low amount of 2% to 3% of the total fund value. Even then however, Ladder is more flexible in that you can specify the top and bottom stock price levels (price level at which you're all in cash or all in stock) and that price range can be quite narrow if so desired which has the potential of uplifting stock price volatility capture benefits considerably.
One way in which to implement a stock AIM like style might be to, assuming a $100K total investment fund amount, create 50 LD-AIM's (or Ladders) allocating $2K total to each, with 66% stock and 34% cash allocations each.
You might then use the combined cash reserve to add an additional Long or Short position to align the overall actual stock exposure with that indicated by vWave (or similar, I personally use something along the lines of that described in http://investorshub.advfn.com/boards/read_msg.aspx?message_id=37163437 ).
Where insufficient cash were available to align the actual overall stock exposure with that indicated by vWave then you could resort to using short double (e.g. SDS) e.g. where you had $66K of stock exposure, $33K of cash and vWave indicated 90% cash, 10% stock, then you might buy $56K of short exposure by buying $28K of SDS.
As vWave changes over time and adjustments to actual versus indicated exposure levels need to be made, what I tend to do is use vWave based sells (reduce stock exposure) to realign individual stock AIM's that have fallen into a 'dead-zone' - where the AIM is 100% in stock and the price is significantly below the next sell price level. For example if vWave indicates reduce stock exposure by $1K then I'll sell some of a dead-zones stock (typically at a loss) to raise that AIM's cash reserve, but then realign the AIM's next buy and sell price levels around that lower stock price level so that it re-awakens the AIM back into subsequently capturing stock price volatility capture benefits.
From the link above you can see that generally I expect to pace buy-and-hold using that style alone. Adding on the stock volatility capture benefits (AIM like trading) therefore value-adds to that.
As a ballpark indicator consider this Ladder
Here we have a top stock price at which we're all-out of 120 and a bottom price at which we're all-in of 80 (20% either side of an assumed 100 central price). When allocated $2K of funds then at each Ladder step we trade a unit amount of $470. The steps are proportionately spaced at 10% intervals between the top and bottom price so for each paired buy/sell (up/down) price move of 10% we trade $470 and make a $47 gain.
Typically 10% price moves occur on average around 2 times p.a. which generates a gross volatility capture benefit of 47 x 2 = $94 which relative to the $2000 allocation = 4.7%. That gain might be reflected across 50 such accounts ($100K total fund) and similarly generate 50 x $94 in gains (4.7% of the total fund).
Trading costs however weigh heavily upon this level of account size and trading frequency, for example assuming two $12.50 trading fees per cycle that $25 combined cost knocks down the gains from $47 down to $22. Even then though we're still left with 2 x 22 = $44 against a $2000 allocation = 2.2% net average volatility capture gain.
With less trading frequency (lower trading costs)/larger amounts, more selective top/bottom price ranges etc. it's not that difficult to get overall net volatility capture gains to 4%+ amounts.
With a Dividend Yield Ladder spanning 2.97% up to 6.8% yield levels, as per Ladder shown in the iBox above, and with the FT100 currently at 3990, Div Yield 5.15%, Cover 2.32, PE 8.36 this implies a 3990 x 0.0515 = 205.5 dividend value and implied top and bottom Ladder FT100 prices of 205.5 / 0.068 = 3021 price for a 6.8% yield and 205.5 / 0.0297 = 6918 price for a 2.97 yield.
A 205.5 yield value with 2.32 cover = 476.72 earnings (which aligns with the reported 8.36 PE) and means that 43% of earnings are being paid in dividends, 57% being retained.
The Ladder therefore caters for around a 24% further price decline from current price levels before being fully loaded into stocks.
Ladder is currently indicating around 35% cash reserve (65% stock exposure).
FT Data source : http://markets.ft.com/ft/markets/researchArchive.asp?report=FTUK&cat=EQ
Comparing the UK and US dividend yields over the same extended late 1800's to present period reveals some pretty close similarities.
Accordingly I've changed the iBox Ladder to reflect the combined averages, so it should work reasonably well with both the UK FT100 and the US S&P500. I've calculated the levels based on the collective average when using average, mode, median and 1.28 standard deviation based calculations (80% of the Bell curve falls under +/- 1.28 standard deviations, so the more extreme top and bottom 10% of high/low yields fall outside of the Ladders span).
I've levelled the steps based on a $100,000 investment being allocated such that each 'step' occurs at a 5% proportional distance.
Such that a $5725 addition (higher yield) or reduction (lower yield) at each step level would generate a $286.24 step cycle (up/down or down/up type pair) profit (i.e. $286.24 = $5725 traded over a 5% price range).
Typically over time such 5% step cycles occur 6 times p.a., so in concept after $25 round trip trade costs that's a 6 x $261 average net profit ($1566) relative to the $100,000 allocation, or 1.57% of the total fund volatility capture benefit (2.6% relative to the funds at-risk).
The longer term mean yield aligns with an indicated 60/40 stock/cash average blend, which is generally accepted as a reasonable stock/cash (bond) blend.
In concept therefore if stocks average 10% and cash 4.5% then the Ladder might be expected to average 0.6(10) + 0.4(4.5) + 1.57 = 9.37%.
Where however, as I do, the cash is allocated to alternative investments that generate 8.7% as per the stop-loss based style I use, then the expectancy rises to
0.6(10) + 0.4(8.7) + 1.57 = 11.05%
As the stop-loss style I use typically averages 50/50 stock/cash exposure, an alternative way to look at this combined Ladder and Stop-Loss style is as a 80/20 average stock/cash blend that's uplifted by the 1.57% volatility capture benefit
0.8(10) + 0.2(4.5) + 1.57 = 10.47%
Either way there would appear to be a pacing of buy-and-hold after allowing for some costs, whilst doing so in a more timely and dynamic manner that should generally lower overall volatility (risk).
The greatest benefit is that of mainly being out of the market at low yield points - which have often pre-cursored large declines (and over which times the stop-loss style typically get's us out of stocks quickly and in a low-drawdown like manner).
With current yields around 5.1% the updated ladder is indicating around 35% cash reserves.
Clive.
Volume | |
Day Range: | |
Bid Price | |
Ask Price | |
Last Trade Time: |