Frank

the time horizon and return objective are key aspects to the step 1 planning aspect of portfolio management. after you get beyond that phase, you eventually get to strategy --- which is what I am talking about. 'capital market expectations' are formed and may change. the situation of the investor might change as well. so this aspect is considered dynamic. whether you are 30 with some small retirement or 40 with a nice amount or 50 with a lot of money, in each case you would like good solid situations with relatively low risk. a trade like buying gold recently easily fits into any of these situations if your capital markets expectations see opportunity in gold. so bottom line, we are all looking for good reward/risk ideas -- how you ACTUALLY factor those ideas into actual positions cannot really be generalized.

fair enough. this thread is trying to be very specific and it doesn't sound like you actually want to be specific about any of your strategies or holdings -- so I wish you the best. fwiw, what you say is not against the grain, I run into advisors with similar mentalities all the time. its kind of a variation on the banker 3-6-3 model: borrow at 3 percent, loan it at 6 percent and be at the golf course by 3pm. I say this with great respect for the virtues of the successful relationship manager (RM) business model -- its a nice life to earn a fee for simply clipping coupons for your clients.

<<95% of your money should be invested in the safest, highest yeilding investments you can find. Only 5% of it should be invested in the high risk investments. So, in essense your thread deals with what you should do with 5% of your other money. >> you can pursue some 'tactical ideas' and still implement them in very conservative ways. you could be 5% gold / 95% short-term bonds. or I could be 30% long US equities and short 30% Europe and long 40% gold. this website allows you to simulate these types of things and gauge for yourself how risky it is. For example, the 30/30/40 portfolio just described is materially less volatile than the standard 60/40% stock/bond portfolio described by John Bogle. then you can look at the trailing volatility for a standard 60/40 portfolio during the 'stress test' of 2008 to gauge how risky that is... trailing 36 month volatility is 6.4% for this portfolio vs 30.1% for the S&P 500. I am trying not to be rude here -- just trying to help you educate yourself on these things that are admittedly complex. holding 95% short-term, risk-free assets for retirement that is far off is just ridiculous. if you can't handle 1/5th the volatililiy of the S&P 500 despite a long-term time horizon to retirement all because the world is just too scary, then you are right, this isn't for you.

mighty mouse, did you read the posts above? the point of the thread is to enhance return and reduce risk -- you made some big assumption about having to sit long in some regional equities (S&P 500)? there are so many options so easily available. you can be in treasuries, corporate bonds, real estate, preferred stocks, convertible sotcks, emerging markets equities, emerging market bonds, sector funds, currencies, industry funds, gold, copper, silver etc --- and the choices grow every month as more and more of these things come out, get trading histories and become liquid. check out my blog on the site. sheesh, I even posted the Goldman 'short europe' research on this site on May 1st. You saw what happened this week. europe collapsed --- even long US/short Europe pair was very solid winner. While you can't sell short in a 401k --- there are inverse funds getting liquid for such types of LOWER risk long/short ideas (volatility is lower/less risky in a long/short environment). you certainly can follow global trends and keep your portfolio generally in line with what is going on --- simply by adding or reducing risk in line with some of our backtested models on the site. that is the beauty of portfolio management -- you choose the level of risk and volatility that is right for you -- and you can structure themes into your own personal risk-tolerance. buy and hold the S&P 500 is for the birds. examples of recent leadership on long side: Long bonds Long gold Long 2x inverse Euro Long Dollar Index Long inverse U.S. Basic Materials (all of these are liquid enough) Your logic missed the entire point of this thread.

here is what you don't do with your retirement money. crazy video of Thursdays intraday action:

In my experience, Betas are not stable -- something might have a really high beta looking back but then suddenly just trade with the market for a 0.99 beta. The other thing is that volatility itself is not static -- so a high beta in a high vol market might be tricky when vol goes dead: http://www.etfreplay.com/etfimages/vol99.png

I am going to elaborate on my last post: In a recent institutional research piece by Goldman Sachs targeted at European portfolio managers, they offer various ways to trade ‘the divergence theme in the Eurozone.’ In the note, they discuss the problems with domestic demand in Europe within the construct of strong global growth, led by the BRIC (Brazil, Russia, India, China) theme. This note was on April 28th and followed a similar note discussing a similar theme targeted at US portfolio mangers. The basic idea of the note is to “Go long international growth & short Eurozone domestic demand.” In both research pieces, they do lengthy analysis of long lists of ‘basket trades’ that portfolio managers could do to implement this longer-term trend. The bottom line of these studies was to create a long basket of stocks (to be long) that has companies with high sales exposure to the strong parts of the world and create another basket with high sales exposure to mainstream Europe and go short that basket. I should point out that these types of basket trades by portfolio managers may not be with a high level strategy in mind – perhaps you have a new account and you just want to get it invested in line with other accounts – or had some outflows from your funds and need to increase cash to meet the outflow. To execute this, you would submit a list of trades, with quantities of shares, to a firm like Goldman or Morgan Stanley or Merrill Lynch and say ‘buy(sell) this basket of 70 stocks on the market close today.’ Then, Goldmans quantitative ‘experts’ figure out how they are going to both ‘guarantee you closing price’ – and make money for themselves. They ultimately do some kind of elaborate combination of trades that hedges themselves --- and can use the liquidity in the futures market with a hedge ratio or whatever else they do to create a profit for themselves – and then they charge an extra fee to the buyside firm to do the program trade. Now – enter ETFs. Think about what you can do now – you can buy any of 1000 pre-set trading baskets that were created by index construction experts at MSCI, S&P, Russell etc. In some cases, such as at Schwab or Fidelity, you can do this for zero transaction fee. Its like the world has aligned in favor of the small investor/advisor here. This is very powerful. I should go on to note that in this most recent research piece by Goldman on ‘trading the divergence’ --- they spend nearly 1/3 of the report going into backtests of their newly created trading baskets. Well, with ETF’s – the trading history total return chart of the ‘basket’ is known. You don’t have to simulate it with high-end, expensive portfolio management software --- you can just run the total return chart. So this is the power in ETFs: 1) the index has been constructed for you by index experts already (the people at firms like MSCI are every bit as smart (I would say smarter) as the people at your typical large financial institution) – they know what they are doing. 2) the trading history of the ETF ‘basket’ is known and 3) you haven’t done any actual work yet and you are already analyzing the characteristics of the ‘ ETF basket’ (its volatility, out/underperformance, historical relationships etc). The bottom line is that banks makes good money recommending these kinds of things for portfolio managers. The longer the list, the more the profits. Big portfolio managers with huge assets under management cannot buy most ETF’s – the ETF’s just aren’t big enough. But you – as the small advisor, small hedge fund or individual investor can -- and that is what our site is all about -- leveraging the inherent and underrated power that ETF’s bring to neutralize the investment landscape. (by the way, our relative strength model pointed towards this weakness in Europe months before Goldman wrote research on this – just go into the ETF screener and move the date back to January and see for yourself) Frank

A good ‘ETF rotation’ strategy can be based on the simple yet powerful concept of ‘Find Global Relative Strength’ and overweight it. This does not mean just equities – it can be anything from U.S. Corporate Bonds to Emerging Markets Infrastructure stocks to Country Funds like Canada, Brazil or Australia. The ETF marketplace has 1000 choices that represent many, many segmented trading baskets – all pre-packaged for you by professional index providers like MSCI and Russell and S&P. This is very advantageous -- MSCI is for example part of the same company that does very high-end institutional portfolio management software (the Barra unit of MSCI-Barra). With some help from an automated software environment – you can find which region of the world and which asset class is showing good relative strength – and then create a portfolio that manages whatever the risk chartacteristics of the chosen markets is. High relative strength --- and risk-controlled through position sizing --- and some portfolio concepts that blend portfolios with low risk bonds or cash to dilute overall volatility to your personal risk tolerance. Try out this relative strength application for an introductory example: ETF Relative Strength Backtest Disclosure: a friend and I developed this website to track global money flows -- it is all free.

This thread is to discuss strategies that relate to your ‘other money’ --- the money you either have in a 401(k) or another more conservative account not marked for intraday trading. My professional background was in asset management. I realized 5 or 6 years ago that I really needed to learn trading better as when volatility becomes high, the trading aspect to money management increases in importance (this move paid off big-time in 2008). So I read book after book on trading. My favorites are Linda Raschkes Street Smarts & Jim Daltons Markets In Profile. I actually eventually went on to write a more formal book review of Daltons book on Traders Lab over two years ago here: http://www.traderslaboratory.com/forums/f6/markets-profile-detailed-book-review-3605.html So after a career in professional money management (~10 years+ and a CFA charterholder) – as well as a ‘career’ in trading – I feel I have a nice diversified background to offer some perspective on how one complements the other. I believe money managers can learn a lot from traders but traders have a lot to learn from money managers as well. Successful money managers are good at finding good secular themes and sticking with them. Successful traders are good at understanding volatility and how to use volatility to make lots of money when the market is offering it -- while preserving it when conditions are not good for short-term trading. I believe that this is where my background has led me --- to merge these two worlds into something coherent. This thread will discuss some of these ideas. I believe that the fusion of these two worlds is in the Exchange Traded Fund (ETF). This product is actually a very sophisticated product masquerading as something that looks so simple. High-end Wall Street strategy is very often about a money manager calling up Morgan Stanley or Goldman Sachs to execute program trades that execute 'basket trades' --- these long lists of individual trades have the designed effect of altering a portfolios exposure away from one type of exposure and towards another type of exposure (exposure representing a theme, such as an economic sector, large cap vs small cap, growth vs value, stock vs bond, international vs domestic etc...). Well, guess what --- buying 100 shares of XLF (U.S. Financials) and selling 100 shares of EWZ (Brazil Fund) does the exact same thing -- except it does it cheaper. Call it the ‘mainstreamization of program trading baskets’. This is a very powerful (and disruptive) innovation which has destroyed the mutual fund model --- has destroyed many of the premiums options market makers used to get from selling options on 'index baskets' and has opened up access to new segments of the world previously inaccessible. While the mainstream world is trying to find stocks --- the real future is in finding 'markets' -- the regions and segments of the world that are the growth engines of the futrue. This is what ETF's represent. This thread will discuss methods and strategies for your ‘other money’ --- focusing on ‘global ETF rotation.’ These will be a blend of longer and shorter timeframe strategies -- just not intraday. Frank

doing the same things in different market environments.

this is an all-time classic: [ame=http://www.youtube.com/watch?v=vIMwMsY0ndo&feature=related]YouTube - Stock Futures Trader losses it all and flips out[/ame]

Here is the key point in my opinion. Ethical business is long-term good business. If a company strays from that and bends its standards because it is playing for short-term market share, it will end up being bad business and will hurt itself long-term. The bullshit is that all the CEOs and executives that did terrible jobs all got rich anyway -- even if a lot less rich than they could have been. Credit must go to those who did a good job this cycle -- namely JP Morgan and Wells Fargo.

Links to the actual 60 minutes piece: Part 1: Inside The Collapse, Part 1 - 60 Minutes - CBS News Part 2: Inside The Collapse, Part 2 - 60 Minutes - CBS News overall well done

60 minutes does good job overall -- though this might just be too complex a topic to do on a broad show like this. I want to see how they explain this --- firms like Goldman Sachs etc were charged interest on the loans the government to them. If you buy treasuries as Michael Lewis says, you are not guaranteed a profit unless you first clear the interest amount you owe. No doubt that getting a check from the government to avoid a run on the bank is a benefit that financial institutions are awarded that nobody else gets. There is also a good reason for this. I am all FOR reducing the pay on wall street as its ludicrous -- but I will watch with interest to see how they explain this topic and see if they can do it without pandering to the mob who still believe banks like Goldman were given huge amounts of money and then Goldman took that money and paid it to their executives --- this is just too simple and its not true. Goldman Sachs, Wells Fargo, JP Morgan -- these firms all paid back the money they were given WITH INTEREST. TARP has so far shown a small profit -- not widely reported. This entire thing was so disgusting but I will watch with interest to see if 60 minutes can do this without skipping the facts.

VIX Futures are relatively new product, having been around just a few years. The VIX Futures ETF made its debut in early 2009. After an initial re-set of volatilty lower after the credit crunch, a relationship can be seen here that may be more intuitive than some other ways. This method 'indexes' VIX and VXZ to a fixed starting and shows the path of each since that starting date. As of last night, the relationship may be at near-term inflection point: http://www.etfreplay.com/blog/post/2010/03/11/VIX-vs-VIX-Futures.aspx