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Hi G,
I can only answer for myself as to why I wouldn't AIM a 3X Leveraged ETF. It has to do with the "construction" of these Leveraged ETFs and how the issuers handle a falling market. Since the ETF is attempting to duplicate 3X the % gain or loss per day, and is not "tied" to any particular price, the issuers can keep their ETF in the desired price range by performing Stock Splits.
On the way up, this is wonderful because you have many more shares than you originally purchased, and this is what you have seen since 2009. Not just the past 5, or 3, or 1 year(s), 9 years. Essentially, since these 3X ETFs have been in existence. Even so, you can get a "hint" of what is in store by comparing the price of your ETF recommendations on 8/1/2011 to 10/3/2011. Most of them lost between -40% and -65% on what was only a -20% market drop. Another way to "estimate" the damage is to compare the prices of all the available 2X Leveraged ETFs that were available in October 2007 and see how much they fell through March 9, 2009. My tests show that most of them lost from -80% to -95%. 3X would be worse (go broke).
Another problem that I have written about before is that the issuers will never have the price of these ETFs go to $0.00 -- they will simply do a reverse split, that is, when the price gets to some very low level, they will perform a 1:10 split (for instance) and you will have the number of share you own reduced by a factor of 10, but the price per share will now be 10 times higher. Then it falls again and the same process is followed. You don't know ahead of time that the split is coming, nor do you know how big the split will be, so it is difficult to have a number of shares that will be divided evenly. In this case, the number of shares you have is divided by the split number and any "left over" shares are sold out of your account with no input from you and at that very low price.
Want an example? Look at the history of NUGT, a 3X Leveraged ETF for the Gold Miners. Since the peak in 2011, it had a 1:3, 1:5, and (I think) three or four 1:10 Reverse Splits. The price never got below about $2.79, but your shares were gone. You say, I never suggested NUGT for AIMing, but the 2008 Bear Market saw the 2X ETF of SPY (SSO) fall -85%; the 2X of QQQ (QLD) fall -83%; the 2X of the DOW (DDM) fall -82%, etc.
I say, you cannot AIM these ETFs through Bull and Bear markets. Perhaps, if you use the Ocroft method of buying and selling out, with real self-discipline, or if you determine to sell out after a certain, predetermined amount of draw down. I think a person is "playing with fire" to AIM these through thick and thin -- your account will get very thin, IMHO.
Respectfully,
Bob
PS I have enjoyed reading your posts and your site.
Allen & TooFuzzy,
I, too, own AMZA, but not enough to AIM. Accumulation will take a while.
Allen, the overnight price drop of about $0.50 was due to the "ex-dividend" date. The actual payment of $0.52 will be made on January 12th, I believe. This same action takes place on the 3rd or 4th day of each quarterly (Jan, April, July, and Oct) payment. The price of AMZA has been falling, but has been a little better the past few months as the Oil & Energy market has gained some recently. My original purchase was at $11.19 a few days before Christmas 2016, so the shares have actually lost more than the dividend has paid. I just recently added another 600 shares at $8.66 because I think the price is "settling down", but I missed the opportunity when the price fell below $8.00 in late November 2017.
The company owns mostly Oil MLPs and supplements the dividends they pay by trading Options, much like you guys are talking about. About 1/2 of the dividend comes from their Holdings and the other half from the trading.
Bob
My problem is that I "bowl my IQ and golf my weight". If I could reverse that, I wouldn't need to invest.
Bob
Allen,
It was not GRC, but GFC (Global Financial Crisis). The crash in 2007-2009 is often referred to as the GFC.
Bob
Hi Allen,
I was interested in the article because I like to trade the Leveraged ETFs (TNA is my favorite) and I have been a follower of Clive's idea of using only a fraction of the cash assigned to a particular trade since he first mentioned it several years ago, so I generally use only 1/3 of the available cash for TNA. I had also read another article that referred to back testing to recommend 2.5 Leverage as the ideal, but I cannot presently locate that article.
I subscribe to VectorVest and do most of my charting and back testing with that software. I decided to run some tests using TNA, UWM (2X), and IWM (basic ETF). First I ran a Buy & Hold test from the low point of 3/9/2009 through yesterday's Close 9/7/2017 for each:
IWM UWM TNA
Total Gain +294.54% +1,109.96% +1,835.41%
ARR + 34.66% + 130.61% + 215.97%
CROR + 17.53% + 34.09% + 41.71%
Max DD - 29.40% - 52.74% - 70.56%
B&H No GFC
Total Gain +327.49% +921.91%
ARR + 21.96% + 61.82%
CROR + 10.23% + 16.87%
Max DD - 59.89% - 29.40%
TooFuzzy,
Just a quick reply. In one of Ocroft's early posts (Post #31585) he told Tom that he looked back at least one year to find the high point. I think the reason for that is that it takes some time for the stock or ETF to break through the Hold Zone and for AIM to then generate Buy Signals. But remember, that high point would have been in the past, not right now. When you look today, that high may have been back in Oct 2016 and be ready, or almost ready for the buy.
To use Adam's stock, QCOM, as an illustration, it took about 18, 19 months for QCOM to complete its downturn -- July 2014 to Feb 2016. But that would have been a great time to "load up" on QCOM. A similar situation in Nov 2008, it only took 3 months for the "drop". The advantage in this is that you can purchase a larger initial position and have plenty of stock to sell if it continues up.
Best regards,
Bob
Ocroft,
Adam,
TooFuzzy,
TooFuzzy,
You may remember some of Ocroft's original postings. He wrote that he would "AIM" the stock from the most recent "high" (in the past), but not purchase until the stock reversed that trend enough to "void" the Buy signal. He would then buy all the $ worth of stock that had been recommended during the down trend.
My assumption was that the original 50% of the account that wasn't used for the Core Holding would still be available if the stock resumed its downtrend. If you follow this procedure, you have two advantages that I see: 1) It will be a stock that actually fell in price enough to make purchases, so you aren't "wasting time" waiting for the price to drop enough to generate signals; and 2) You will have a much lower average price for potential gains. If you are selective in the stocks (ETFs) you consider, you will have a position with a solid Core Holding, larger than what it would have been by buying at the high. And you are doing this in Real Time because the downtrend would have already been happening.
He was not looking to AIM a stock, but simply using AIM to get him into a potentially profitable trade. You, on the other hand, would be able to AIM the position from there.
Respectfully,
Bob
Reverse Splits.
As I have been reading the recent posts, I have not seen anyone write about a "problem" with Reverse Splits that I have run across.
If you have 289 (example) shares of XYZ and they perform a 1:10 Reverse Split, you will end up with 28 shares at the new price. Problem: what happened to the other 9 shares? They are sold at the pre-split price and that money is credited to your account as cash. You don't have any "say" in this action, it is done without your consent.
No matter how many shares you might have, any "left-over" shares will be cashed out. Reverse Splits usually occur when the price has fallen, so you are losing money most likely.
I had a position in NUGT (3X Leveraged ETF of the Gold Miners Index) which experienced reverse splits since 2011 of 1:3, 1:5, 1:10, 1:10, 1:10, and forward split of 5:1. Now the price has fallen enough to be looking at another reverse split. The ETF will never go to zero, but your position will!
Bob
Adam,
I don't know why, but I have heard it attributed to Donald Trump's campaign promises to undo the Dodd-Frank act, which severely penalized small and regional banks. This is also the explanation given for the losses in Tech and Semiconductor stocks.
Bob
TooFuzzy,
I believe it was Don Carlson who added a moving average to AIM to filter the signals (it seems to my memory that it was a 30 Period MA). Ocroft wrote about delaying all Buys until there was an "absence" of Buy signals, then making all Buys that were signified to that date, as expressed in dollar amounts, not share amounts. He did not handle his "Sells" in the same manner -- he was simply looking for a 20% Gain on the position -- though one could readily enough, follow that procedure in reverse. He has written lately of using the Monthly MACD in much the same way you describe using the MAs.
Thanks for replying.
Bob
Praveen,
Another follow-up on my original inquiry about your position in FaceBook (FB). It has now been 3 years since you first purchased it, and they have been really good years. An earlier reply to my questions stated that you had purchased a total of 74 shares as of December 2012, just out of curiosity, how many shares do you presently own? My guess would be around 25 or 26 shares. Do you use the money generated each December to accumulate new stocks? Is there a "limit" on how many stocks you are willing to own, and you simply start raising the level from $2,000 to $3,000 per stock?
Thanks for putting this style of investing out in the Public view and congratulations on the success of this issue.
Bob
LC,
I recently re-read a post by Lance Roberts that I thought might be appropriate for this board because it is a variation of "Core" Investing, but does not fit on the AIM board. The article is: Avoid the 10 Worst Days.
He has a link at the top of his post "The Math of Loss" to a previous post that gives additional details. The idea is that you have some money with which to buy a position in a stock or ETF -- so this is not "stepping-in" like DCA or Synchrovest -- but it is systematic in its approach.
Basically, he uses three "timing" mechanisms to step-in and step-out of your holding. His purpose is that "Buy & Hold" investors actually spend 90% to 95% of their investment time recovering from the losses from the previous high point, so he wants a method to avoid those Down-Turns...
To All,
I believe, and act upon, the idea that a person needs to know what kind of investor they are, and act within those "boundaries". I am not a Value Investor, nor an AIM Investor, as such -- I tend to be an "All In - All Out" type of Investor (not a Trader). I don't want to own stocks (or ETFs) during a severe down turn. That is why Ocroft's Method interests me, especially with the Monthly MACD, as does the Mebane Faber's "Ivy Portfolio" that is "timed" with entry/exit based on Monthly Moving Averages on quality ETFs that give a good degree of "Asset Allocation".
The idea of Value Investing appeals to me, but I know I would not be able to "ride out" another 2008, or 2001-2002, when nearly all categories of investment classes were "highly correlated", and fell as if they were all the same issue. The same applies for AIM -- I would not be able to hold the "core position" during the "downs". I know that LD-AIM works at getting around that by having "Virtual Shares", but I do it with the long-term MAs, and such.
Nonetheless, I do try to read up on these other methods to help me select the various instruments I might want to purchase at the right time. I came across an article that might be of interest to you all (y'all) that I have not seen on this board. It might be more appropriate on Mark Hing's board, but I'll link it here because it has worth for all of us.
http://25iq.com/2015/01/25/a-dozen-things-ive-learned-from-joel-greenblatt-about-value-investing/
I am going to paste one section here so you can get an idea.
Neko,
In the prior post, I stated that Rule #3 was very important to me. This is because I am more "comfortable" getting entirely out of a position than "holding on" during the down trend. But when it comes time to Sell, my methods require me to hold on until "after" the ("a") peak -- so I often watch Long-Term Moving Averages for Exit points (and have recently been using the "Reverse Ocroft Method", as well).
This Rule #3 (and the last paragraph in Rule #10) have caused me to think in terms of obeying the AIM signals to Sell along the way, and then, close the position with the other signals.
What I mean is, I don't really have a problem with "getting out" with less than the "maximum profit", or "leaving money on the table". If the Fed wasn't doing "ZIRP", I would be quite content with the "normal" interest rate on CDs and not even think about the Stock Market for the major portion of my life savings.
So, I am going to go back through my position's histories and simulate obeying those Sell signals, to see how "drastically" this idea would have affected my results. Would they still have met my "true goals", and just reduced my "greed goals"? Am I, after all, one of the "greedy"?
Regards,
Bob
To All,
I was reviewing an article by Lance Roberts that he had written back in August 2013. I thought it might be of interest to AIMers, but perhaps "off your beaten paths". I decided to Copy & Paste the article to this post rather than just provide a link. Rule #3 is especially important to me. Rule #9 will be familiar to any of us who have read anything Tom Veale has written. There are some charts in the article that did not transfer, but can be found at the link. The link to the article is:
http://streettalklive.com/daily-x-change/1786-10-investment-rules-to-live-by.html
10 Investment Rules To Live By
Lance Roberts
Thursday, 08 August 2013
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I was recently interviewed by Fox Business for my thoughts on what "first time" investors should be doing right now. As the markets are propelled higher by the successive interventions of the Federal Reserve it is hard not to think that the current rise will continue indefinitely. The most common belief is currently that even if the Fed begins to "taper" their purchases the resurgence of economic growth will continue to propel stocks higher even in the face of higher interest rates. The financial world has finally achieved a "utopian" state where there is no longer investment risk in any asset class - because if it stumbles the central banks of the world will be there to catch them.
However, a quick look at history tells us that this time is not really different. In March of 2008 I was giving a seminar discussing why we had already likely entered into a recession and that a market swoon of mass proportions was approaching. While the advice fell on deaf ears as we were in a "Goldilocks" economy, and "subprime" was contained, the bubble ended just a few short months later as it was no "different" then versus any other time in history, or, even now.
The reality is that markets cycle from peaks to troughs as excesses built up during the up cycle are liquidated. The chart below shows the secular cycles of the market going back to 1871 adjusted for inflation.
S&P500-1871-Present-Real-080813
This time is not different. The excesses being built up in the markets today will eventually be reverted just as they have been at every other peak in market history.
There are 10 basic investment rules that have historically kept investors out of trouble over the long term. These are not unique by any means but rather a list of investment rules that in some shape, or form, has been uttered by every great investor in history.
1) You are a speculator - not an investor
Unlike Warren Buffet who takes control of a company and can affect its financial direction - you can only speculate on the future price someone is willing to pay you for the pieces of paper you own today. Like any professional gambler - the secret to long term success was best sung by Kenny Rogers; "You gotta know when to hold'em...know when to fold'em"
2) Asset allocation is the key to winning the "long game"
In today's highly correlated world there is little diversification between equity classes. Therefore, including other asset classes, like fixed income which provides a return of capital function with an income stream, can reduce portfolio volatility. Lower volatility portfolios outperforms over the long term by reducing the emotional mistakes caused by large portfolio swings.
3) You can't "buy low" if you don't "sell high"
Most investors do fairly well at "buying" but stink at "selling." The reason is purely emotional driven primarily by "greed" and "fear." Like pruning and weeding a garden; a solid discipline of regularly taking profits, selling laggards and rebalancing the allocation leads to a healthier portfolio over time.
4) No investment discipline works all the time - however, sticking to discipline works always.
Growth, value, international, small cap or bonds all have had times when they topped the charts in terms of return. However, like everything in life, investment styles cycle. There are times when growth outperforms value, or international is the place to be, but then it changes. The problem is that by the time investors realize what is working they are late rotating into it. This is why the truly great investors stick to their discipline in good times and bad. Over the long term - sticking to what you know, and understand, will perform better than continually jumping from the "frying pan into the fire."
5) Losing capital is destructive. Missing an opportunity is not.
As any good poker player knows - once you run out of chips you are out of the game. This is why knowing both "when" and "how much" to bet is critical to winning the game. The problem for most investors is that they are consistently betting "all in all of the time." as they are afraid of "missing out." The reality is that opportunities to invest in the market come along as often as taxi cabs in New York city. However, trying to make up lost capital by not paying attention to the risk is a much more difficult thing to do.
6) Your most valuable, and irreplaceable commodity, is "time."
Since the turn of the century investors have recovered, theoretically, from two massive bear market corrections. After 13 years investors are now back to where they were in 2000 if we don't adjust for inflation. The problem is that the one commodity that has been lost, and can never be recovered, is "time."
For investors getting back to even is not an investment strategy. We are all "savers" that have a limited amount of time within which to save money for our retirement. If we were 15 years from retirement in 2000 - we are now staring it in the face with no more to show for it than what we had over a decade ago. Do not discount the value of "time" in your investment strategy.
7) Don't mistake a "cyclical trend" as an "infinite direction"
There is an old Wall Street axiom that says the "trend is your friend." Investors always tend to extrapolate the current trend into infinity. In 2007 the markets were expected to continue to grow as investors piled into the market top. In late 2008 individuals were convinced that the market was going to zero. Extremes are never the case.
It is important to remember that the "trend is your friend" as long as you are paying attention to, and respecting, its direction. Get on the wrong side of the trend and it can become your worst enemy.
8) If you think you have it figured out - sell everything.
Individuals go to college to become doctors, lawyers and even circus clowns. Yet, every day, individuals pile into one of the most complicated games on the planet with their hard earned savings with little, or no, education at all.
For most individuals, when the markets are rising, their success breeds confidence. The longer the market rises; the more individuals attribute their success to their own skill. The reality is that a rising market covers up the multitude of investment mistakes that individuals make by taking on excessive risk, poor asset selection or weak management skills. These errors are revealed by the forthcoming correction.
9) Being a contrarian is tough, lonely and generally right.
Howard Marks once wrote that:
""Resisting – and thereby achieving success as a contrarian – isn't easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That's why it's essential to remember that 'being too far ahead of your time is indistinguishable from being wrong.')
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it's challenging to be a lonely contrarian."
The best investments are generally made when going against the herd. Selling to the "greedy" and buying from the "fearful" are extremely difficult things to do without a very strong investment discipline, management protocol and intestinal fortitude. For most investors the reality is that they are inundated by "media chatter" which keeps them from making logical and intelligent investment decisions regarding their money which, unfortunately, leads to bad outcomes.
10) Benchmarking performance only benefits Wall Street
The best thing you can do for your portfolio is to quite benchmarking it against a random market index that has absolutely nothing to do with your goals, risk tolerance or time horizon. Tom Dorsey summed this up well by stating that:
"Comparison in the financial arena is the main reason clients have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus. If you tell a client that they made 12% on their account, they are very pleased. If you subsequently inform them that 'everyone else' made 14%, you have made them upset. The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy. Money in motion creates fees and commissions. The creation of more and more benchmarks and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage."
The only benchmark that matters to you is the annual return that is specifically required to obtain your retirement goal in the future. If that rate is 4% then trying to obtain 6% more than doubles the risk you have to take to achieve that return. The end result is that by taking on more risk than is necessary will put your further away from your goal than you intended when something inevitably goes wrong.
It's all in the risk
Robert Rubin, former Secretary of the Treasury, changed the way I thought about risk when he wrote:
"As I think back over the years, I have been guided by four principles for decision making. First, the only certainty is that there is no certainty. Second, every decision, as a consequence, is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly, we need to judge decisions not only on the results, but on how they were made.
Most people are in denial about uncertainty. They assume they're lucky, and that the unpredictable can be reliably forecast. This keeps business brisk for palm readers, psychics, and stockbrokers, but it's a terrible way to deal with uncertainty. If there are no absolutes, then all decisions become matters of judging the probability of different outcomes, and the costs and benefits of each. Then, on that basis, you can make a good decision."
It should be obvious that an honest assessment of uncertainty leads to better decisions, but the benefits of Rubin's approach goes beyond that. For starters, although it may seem contradictory, embracing uncertainty reduces risk while denial increases it. Another benefit of "acknowledged uncertainty" is it keeps you honest. A healthy respect for uncertainty, and a focus on probability, drives you never to be satisfied with your conclusions. It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.
The reality is that we can't control outcomes; the most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time.
Tags: Investing
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Lance Roberts
Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of "Street Talk with Lance Roberts", Chief Editor of "The X-Factor" Investment Newsletter and the Streettalklive daily blog. Follow Lance on Facebook, Twitter and Linked-In
I hopes this is of interest to you.
Bob
For those of you looking for a "Candidate" for regular AIMing or for "Ocroft Method" AIMing, here is a link to Doug Short's monthly article using 10 or 12 month moving averages on the 5 ETFs in Mebane Faber's Ivy Portfolio:
http://www.advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php
You can see in the "side-boxes" that 3 of the 5 ETFs are fully invested because they are above their respective MA. However 2 of the ETFs are in Cash because they are currently below their MAs. You'll notice that DBC is significantly under its MA -- this is the one that may be a candidate. It is down about -31% since mid-June this year -- it is a "commodities" ETF and is down primarily because of the Oil price collapse -- it does not pay a dividend.
I wanted to bring it to your attention because it is down hard, but is a high volume (high liquidity) ETF that will provide some diversification for those of us without "fortunes". It holds a "broad basket" of commodities -- not just Oil. You could do worse than to AIM the Ivy Portfolio. This is the same idea that Tom promotes with the "Ultimate Buy & Hold" portfolio, but on a reduced scale.
Regards,
Bob
New Years Resolution:
For those of you who are interested in starting new AIM positions in the next year, or so, why not start a "Virtual AIM Program" in the stocks/ETFs/Mutual Funds of your choosing, beginning in January. Since there are an average of 21 trading days per month, you might start 21 new programs in January, one for each trading day -- once you have it set up, it would likely take only 10 minutes, or less, per day (February usually only has 19 trading days, so you would have to spend 20 minutes on a couple of days). This would be a wonderful way to really get familiar with the AIM structure and methodology -- see what kind of issues work best with AIM and which do not do so well. Forward testing is better than back testing, in that we know the "future" with back testing, but not with forward testing. This would also give you the opportunity to "step-in" to an AIM program that you like with full confidence in the Cash/Stock percentages you use.
I believe the easiest method would be to set up a spread sheet in Excel and make a "template" of that format. And, rather than using a particular "date" of the month, I would suggest using the number of the "trading day" of the month (1st trading day, last trading day, 12th trading day, etc) as part of the Title of the SS. You might also set up spread sheets for the day before Options Expiration and the day of Options Expiration, for those of you who are interested in Options and how that might affect the "underlying" prices.
Another variation might be to set up "parallel" SS (on the bottom of the SS there are tabs for Sheet 1, Sheet 2, etc.) with the different Stock/Cash proportions -- 50/50, 67/33, 80/20, or VWave. You could also have one tab for running an "Ocroft Method" SS, when the particular issue met the qualifications he has described.
I think, if you set these up and diligently maintain them, many of your questions will answer themselves.
Wishing you all the best in this upcoming New Year.
Bob
Thanks for the response. Point by point:
Toofuzzy,
Perhaps you would be kind enough to explain why you have chosen to "AIM" the Leveraged ETF, ERX, rather than "LD-AIM" it. I have never done an LD-AIM program, and I know you have, but I studied the calculator that Steve has provided, and it seems to me that a Leveraged ETF is "ideally suited" for the LD-AIM concept, because it will ultimately "sell-out" the actual shares in a long enough Up Trend (leaving only "Virtual" shares). AIM, on the other hand, will have you holding on to a "Core" position, through all ups and downs over the years, and you may face the prospect of the Reverse Splits, if the down trends are particularly sharp or long-lasting.
The second question I have is, have you determined that AIM will provide you primarily with Short-Term Gains, and so you are not concerned with the Leveraged ETF possible failure to qualify for Long-Term Capital Gains tax rates?
I ask these questions because I have a similar position in NUGT, the 3X Leveraged ETF of the Gold Miners Index/ETF (GDX) and am facing some of those decisions. I have been buying NUGT as AIM directs, but plan to sell "all" my shares doing something similar to Ocroft's plan for "buying", but on the "sell" side. Both NUGT & ERX are 3X Leveraged ETFs of "commodities" and may qualify for another tax consideration altogether. I also do not know for certain how this will affect my previous tax filing of "estimated" taxes on my rather large gains (15 months) in TNA. I might get a very unpleasant surprise in February 2015 (I am holding cash to cover this surprise, but the penalties and interest would still hurt).
Regards,
Bob
Hi all,
The other day I was looking at the articles posted by Doug (nice articles, Doug, -- good reports), and I read the part where he referred to getting a Beta Rating for the Sector ETFs from Morningstar. I went over to that site, and while reading some of their information on Leveraged and Inverse ETFs, came across a statement that I had never seen before.
The statement was to the effect that Leveraged and Inverse ETFs may not qualify for Long-Term Capital Gains consideration, regardless of how long the investor has held the ETF, because of their "daily resets".
Do any of you know, from experience, anything about the tax consequences? If there are times when they do qualify for L-T? Or specific times when they do not qualify?
I am going to "run into" this situation this year because I have been using long-term moving averages (20 Week & 52 Week MAs) in my taxable account and I had a sale in February this year of a position in TNA (3X Leveraged ETF of the Russell 2000 Index) that I had purchased in Nov of 2012 (held for 15 months). The Total Gain on the position was about 147%, so I filed (and paid) Estimated Taxes on the Long-Term rate (20%). I used one of the Internet Tax Programs and it did not alert me to any problem. But the difference between Short-Term Cap rates and the Long-Term will be "significant", especially if there are "penalties" for underpaying.
I am not looking for "free" information (I know TooFuzzy is working in the Tax Preparation field), but, if this is true, I need to re-think how I work my taxable account.
Bob
Allen,
The answer to your "puzzlement" is contained in the Quoted block,
Allen,
My first response to you is that my post was only meant to be a "caution" about using Inverse or Leveraged ETFs -- they do not behave the same way as Basic ETFs because they are not locked to the Index price, but only percentage variations. I have not seen the "Splits" discussed and was really not aware of how that affected AIM's "handling" of the ETFs.
Secondly, I overstated the idea when I said, "I could lose the entire position." Obviously, I would only lose the stock position, if NUGT continues downward. I have already reached my limits on Cash contributions. When I began the position, I already knew it was in a down trend and began with a 50/50 allotment -- then I followed Clive's suggestion of only using 1/3 of the funds allotted to stocks because of it being a 3X Leveraged ETF, so that acts a 33% Stop Loss in and of itself. For example: If I had allotted $20,000 for the position and apportioned it 50/50, only $10,000 would have been assigned to Stocks for the initial purchase. With the Leveraged ETF, only 1/3 of that was actually used ($3,333) for the initial purchase, and another, equal amount, was set aside for future purchases, for a total of $6,666 toward the stock position, the remaining $13,334 was kept in Cash equivalents. So, thanks to Clive for that input.
I just wanted to warn anyone starting a new program not to assume that an ETF is an ETF -- all the same. These Inverse and Leveraged ETFs are not the same as the basic Index ETFs and AIMing them is much like AIMing a really "volatile" stock.
Regards,
Bob
A caution about AIMing Inverse or Leveraged ETFs.
There is a problem with AIMing Inverse or Leveraged ETFs, that I have not seen discussed on this board, or anywhere else. When AIMing a stock or ETF, you hold through "thick and thin", that is, through all ups and downs (buy more on the way down and sell on the way up), and this creates a potential "problem" when applied to these "special" ETFs.
Both Inverse and Leveraged ETFs are tied to a percentage of the "movement" of the price of the Index, but are not tied to the actual price, itself. Their price "floats" in a range determined by the ETF issuer. This means that anytime the price of the ETF gets below a level acceptable to the issuer, they simply do a Reverse Split to get the price back up within that range.
What happens to you? Why nothing, except that you now hold fewer shares at a higher price -- the same value. Oh, one other difficulty -- if the number of shares you held weren't evenly divisible by the Reverse Split, your excess shares are sold off at that "pre-split" price, so you have involuntarily sold those shares at a time not of your choosing.
Oh, and what if the price continues downward and they decide to have another Reverse Split? Can't happen, you say. Look at NUGT, a 3X Leveraged ETF on the Gold Miners Index (GDX is the Basic ETF). Since its peak in Sept 2011, it has had several Reverse Splits and the "equivalent" price drop from $2,182 to last night's Close of $9.80. I know it has had at least three Reverse Splits (1:3, 1:5, and 1:10).
What if you had purchased 500 shares before these splits? 500 shares divided by 3 gives you 166 shares, with two shares sold off. 166 shares divided by 5 gives you 33 shares, with one share sold off. And 33 shares divided by 10 gives you 3 shares, with three shares sold off.
The essence of the situation is that, while the share price will never go to Zero, your position might. I am facing this situation currently in NUGT. I purchased 50 shares after the 1:10 Reverse Split, added 50 more shares at an AIM directed point, and recently added another 130 shares. So I presently have 230 shares of NUGT. And the last time its Price fell below $10, they had an "unannounced" 1:10 Reverse Split. I could easily lose this entire position.
Basic ETFs, like SPY or QQQ OR IWM, are tied directly to the price of the Index, and so, are extremely unlikely to go to Zero. For SPY to go to Zero, all 500 stocks, plus all replacement stocks, would have to go to Zero. If they do, it is quite likely that the money lost will be the "least" of your worries.
Again, I only write this as a "caution". I think the "Pricing Nature" of Inverse and Leveraged ETFs is "Anti-AIM". Be careful.
Bob
Allen,
With my bad knees, I could use the cane, but any dancing I would do would be more like Lou Costello.
Bob
Allen,
I've mentioned it before, but you might look at "The Ivy Portfolio", by Mebane Faber for ideas. He had worked for the Harvard Endowment Fund and, in this book, gives examples of three portfolios which reflect the kind of thinking that goes into making investment allocations at that level.
The three portfolios are made up of readily available ETFs, but are scaled to allow for various sized accounts -- one contains 5 ETFs, another contains 10 ETFs, and the third has 15 ETFs. In the book, he adds another factor to the process by putting a 10 month SMA on a monthly graph of each ETF in the portfolio, and is then Invested or in Cash for that portion of the portfolio, dependent on whether the Price of the ETF is above or below the SMA.
You can see an illustration of this at the website run by Doug Short, The Ivy Portfolio Signals. On the last trading day of each month, he gives you the ETFs of the "5 ETF Portfolio", and the signal status of each. He also gives another box with the same information, but using a 12 month SMA, instead of the 10 month SMA. Since these portfolios are "managed" once a month, there should be no difficulty substituting AIM for the SMAs.
The concept, of course, is very similar to Tom's links to "The Ultimate Portfolio". I mention it because of the listing of specific ETFs and because it is "scaled" to accounts of differing proportions.
Regards,
Bob
Thanks, K.
I found the website as I was scrolling though his posting history. I wasn't very much attracted to his example , nor to his explanation of the method. The original (as far as I know) article in Stocks & Commodities magazine in 1998, was much more thorough and didn't imply that this was for "cheap" (very low price) stocks, as did Jibes' comments.
I am not trying to criticize Jibes, but just saying that, if I had read his site first, I would not have given the method a second thought. I would not want to AIM a $3-$5 stock.
Bob
Karal,
Thanks for that link. I have read quite a few posts by Jibes over several of the AIM boards, but do not remember any reference to Free Shares, so I appreciate that link. It could simply mean that the "Free" shares did not mean anything to me at the time and I just "skimmed" over them. Can you tell me on which IHub site he wrote about this? I will trace it down by his user name, but that info will help narrow down the field.
Bob
Thanks for your response, Tom.
That is what I had in mind when I decided to post the idea. I think of TooFuzzy's oft times suggested, "When you are beginning AIM, start with one position and work it for two or three years before starting another position". This ZCA procedure could easily fit into that process. The main difference that I see with ZCA is that this is a deliberate goal, with AIM it is a pleasant side effect.
The trade sizes wouldn't have to be large. The first example required $10,000 and the second would require about $6,600, nor would the process require "round lots" of 100 shares, or multiples, thereof. But it might be a way to "work your way up to" a solid "Core" position that could be AIMed.
Bob
Clifford,
Do you know anything about "Zero Cost Averaging"? I have read an article in Stocks & Commodities magazine by Thomas Bulkowski and another (earlier, 1998) article by Terrance Quinn & Kristen Quinn.
They describe two basic techniques to accomplish their goal of investing in a particular stock until it reaches the goal of being able to sell enough shares to return the original purchase costs to the investor, but still retain numerous shares of the stock, where the cost-basis would be $0.00. The idea is to accumulate enough "free" shares to satisfy that portion of a diversified portfolio, and then do the same procedure on another stock, and another, and another.
The first technique is to figure out ahead of time how many shares you must purchase so that when the share price gets to your target, you sell a portion, but keep the "freebies".
Example: Buy 500 share of XYZ at $20 per share. This costs $10,000. When the share price of XYZ reaches $25, the investor sells 400 shares. $400 X $25 = $10,000, with 100 shares left over.
Since not all stocks go directly to their "target" price, the second technique is for stocks that "oscillate". You are wanting to hold a position in ZYX for your portfolio and it is priced at $12. You decide that you will increase the number of shares by 50% when the price falls 25% and you will sell 50% of the original number of shares when the price rises 25% from this initial value. 25% of $12 is $3,so you are looking at $3 increments. You buy 400 shares at $12 and the price falls to $9 (-25%), so you buy another 200 shares. Then the price rises back to $12 and you sell 200 of the 600 shares you hold. You now have 400 shares again.
If the price rises another $3 to $15, you sell 300 shares for $4500 and you have 100 "free" shares plus $300 extra. But if the price falls again to $9, you buy another 200 shares, for a total of 600 shares. When price goes back to $12, you sell 500 shares and have 100 shares at zero cost. This does not include commissions or taxes, but gives an idea of the procedure.
To read what Bulkowski has written on the subject, simply Google "Zero Cost Averaging" and follow the links. He has quite a few articles at the insert-text-here.
I believe this thinking fits most of the investors "mind set" who follow this board and Tom's AIM board. I have not seen this discussed anywhere until I read the articles in "S&C".
Regards,
Bob
Allen,
I think you misunderstand Ocroft's method. This is NOT for existing positions. Ocroft carefully explained that he looks for several candidates, stocks that are currently rated A+ in quality by S&P, then looks at those stocks on a graph. The times that I have looked at the S&P list, there have been more than 40 stocks rated that high.
When he looks at the graphs, he looks for those stocks that have had a recent (within the past year) high point and have since fallen from that high. Of the 40+ stocks, perhaps only 10 meet this qualification. He then begins a 50/50 AIM program on each of those 10 as though he bought them at their High Point (this is a "pretend" program because that pretend initial purchase took place in the past, he did not actually make the buy at that time).
He then runs the AIM program for each of the stocks up to the actual date he is considering them. Most of these stocks will not have fallen enough to trigger a Buy signal from AIM (remember, these are the 40+ best stocks available in the market on today's date), but two or three may have dropped enough to trigger that Buy signal. He now ignores those still in the Hold Zone and focuses on the two or three stocks remaining. If one, or more, has generated Buy signals in the past and now gives Zero Buy/Sell advice, he considers making all the purchases AIM has advised up to that date. He still has not spent any money at all -- he's at the decision point now.
This process should tell you that he is not "Ocroft AIMing" his favorite stock, or stocks, except in the sense that his favorites are the stocks rated A+ by S&P at the time he is looking. That means that he is not stuck waiting for the stock to "fall" again after he has "sold out", he just finds a new candidate for his money by following that same procedure again, and again. The only time he has his money sit "idle" is when there are no candidates, or he just wants to sit out for a while.
Allen,
You are welcome to the "off the wall".
One caution is to be sure you go far enough back in time to allow AIM to go through both Buy and Sell cycles, so it can give you a true picture.
Bob
Allen,
I assume you have read through the posts by Ocroft. You might try a similar tactic when considering new AIM possibilities -- simply take that issue back in time, two or three years, and start the "pretend" AIM program then. This will inform you as to what advice AIM is presently giving for that Stock/ETF and you can then decide to begin a program or to wait based on that current AIM advice.
You could even proportion the Stock/Cash percentages to that current AIM advice, and almost run the "new" program as an extension of the "pretend" AIM. If it is "nearing a top", but not quite there, you might even get a few more Sells before the "actual" top. But you would be giving AIM a "fighting chance" if next month proves to be the top -- and we simply don't know.
Regards,
Bob
Alton,
Hello Cap,
I am not interested in BitCoin, but I still have your old site, "Cap's Trading Diary" on my Favorites list and periodically read the "Milestone" posts.
I know you have written that you no longer do that procedure, but I like to look at it, because it makes me think.
Thanks,
Bob