Allocations Now

[haha]

Hi,

Recap on my allocations. I use "dynamic allocation", sometimes pejoratively called market timing. I have been raising cash for 18 months or so, but my investments have all been very strong so my allocations have been pretty stable.

Cash and fixed income is 61%. Equities 39%, of which 6% is gold equity, 16% energy, 10% foreign stock mostly Japanese and UK, and 7% US Stock. The US stock is fully hedged by puts after a 5-7% decline. In a large decline the increasing deltas of my out-of-the-money puts would make me way more than 100% hedged re: US stock.

Ha

 

[Cool Dood]

Cash and fixed income is 61%. Equities 39%, of which 6% is gold equity, 16% energy, 10% foreign stock mostly Japanese and UK, and 7% US Stock. The US stock is fully hedged by puts after a 5-7% decline.

Isn't it a bit late, then?

Why so much cash and fixed income? Why gold? Why UK? Why do I ask so many questions?...

 

[haha]

author=Cool Dood link=topic=6843.msg122568#msg122568 date=1143943850]

Isn't it a bit late, then?

I am not sure I understand your question, but I think you mean why allow a 5-7% drop. The reason is cost. It is quite expensive to buy at the money puts. I am not sensitive to a small correction; it is big drops that I want to hedge. Figuring out just how much hedge you have is very sensitive to how far the index or ETF or whatever you are hedging falls.

Why gold?

I have been advertising my gold holdings around here for a long time. Why gold? Because I thought it would be profitable; and it has been very much so.

Why UK?

I have 2 UK stocks that I have had >10 years. They are permanent holdings.

Ha

 

[mikew]

Hi Ha
Interesting allocation. A couple of questions
What scenario are you looking for?

How long are you expecting to hold the cash?

Does your thinking include a drop in the US dollar?
   
I am also collecting cash (Yen).
Mike

 

[mathjak107]

well i dont try to rule out the drops or eliminate them, i plan for them .im not really smart enough to do that even most of the time...i just figure at this point i look at the long term averages for my mix..if its 50/50 or 60/40 well than the long term average is around 7-8 % a year..if i gained 12-15% over the last few years i know and figure that somewhere it has to drop and level out at that 7-8% range.....since thats the range i planned for the drops arent a probelm....not worth cutting the gains when the gettings good with hedges and market timing attempts. you see investing is when you accept the market averages and speculating is what you have to do to beat them.....

 

[unclemick]

75% VG Target 2015
14% Individual stocks - utes, oils, REIT, Drugs, Banks, Food, middle of the road div stuff.
(7% Lifestrategy mod in Roth for old age)
4% cash

Will be 63 this year - 13th yr of ER. 5% of portofolio taken out for spending - not getting any younger and doing some remodeling. My cheap bastard days are behind me.

Income:

51% - IRA(trad)
21% - early SS
15% - non cola pension
13% - stock dividends

 

[Jarhead*]

Isn't it a bit late, then?

Why so much cash and fixed income? Why gold? Why UK? Why do I ask so many questions?...

Cool Dude:

You're asking questions because at age 24, that's what you should be doing.

Re: Ha's allocation, and mine, for that matter would not make a great deal of sense for young folks.

If the purpose of a thread re: Asset Allociation is to see what your counter parts are doing, it should start off with I'm (your age), I have no pension (or do), etc. etc.

Situation and age related considerations will be all over the ball park in this forum.

Jarhead

 

[mathjak107]

only thing ill caution is you have alot of dough in allocations that depend on a weak dollar and energy...those sectors,gold energy and foreign can be extremely volatile and suck your entire portfolio under water if they fall much....

 

[Cool Dood]

Ha, I think I just misread your sentence -- I thought you meant "The US stock is fully hedged by puts after a 5-7% decline" as in, after a 5-7% decline in the underlying stock value occurred, you figured you should protect against further drops with puts -- in which case it would have been a little too late to protect against your 5-7% decline...

Jarhead, you're right, one's portfolio needs vary hugely depending on one's age and situation. I guess I sort of assumed that "hey, I'm like me -- everyone else must be like me, too!"

 

[haha]

Hi Ha
Interesting allocation. A couple of questions
What scenario are you looking for?
How long are you expecting to hold the cash?

As long as it takes until I think I see higher cash returns to equity; or until we have considerably higher long term interest rates. Privately, I believe that there is maybe a 50% probability that the equity possibilities will improve by late this fall. The way I evaluate it, US stock valuations are high pretty much across the board. We also are in the 2nd year of the US Presidential Election Cycle, an historically dicey time. Additionally, some technical factors are giving the market a tired look. Recent equities action really does look like distribution to me.

One area of longer term investment that is looking better to me at least is TIPs. I have a lot to learn about them. I think they are more complicated than it appears at first glance.

Does your thinking include a drop in the US dollar?

My plans don't depend on that. It may happen; certainly relative to some Asian currencies the USD appears to be overvalued.
   

I am also collecting cash (Yen).

Seems like a plan to me!

Ha

 

[wildcat]

Ha -

I like your strategy, especially for someone who has already retired. Couple questions:

1) I assume you are buying the deep, out of money puts for a pretty cheap price. First, do you feel the cost compensates the potential reward? In other words, would a drop of that magnitude adversely affect your financial situation? It seems like you are already in a great position to take advantage of any substantial drop in equity valuations. Second, do you time the put positions based on the technical indicators you follow?

2) Have you actively managed your money as described in your OP through the accumulation years, the ER years or both?

 

[haha]

Wildcat, the put thing is hard to discuss in detail. I don't always carry them. I purchase and carry them when I would otherwise probably sell all my stocks and have to pay the taxes. I have made very small use of puts in my tax sheltered accounts- I just sell stocks if I don't like the risk/ reward. (Risk/ reward is subjectively determined by me for me.)

As to strikes- at a time like now when I am pretty negative on technicals and seasonals /cycles as well as valuations, I have some strikes that are pretty close to the money. VIX is so low that they still don't cost much. If they all expire worthless, I will still be way ahead of selling stock and paying tax; though not ahead of forgoing the insurance altogether. But of course if the market does go down (something that we tend to forget can happen) I will be way ahead. At the last big top, I carried puts on QQQ (now QQQQ) from about August 99 into the Jan2000 expiration. So they expired worthless; I gave up because I was tired of being wrong and watching my time value evaporate. Luckily I did have some semiconductor puts with later expirations that got some of my money back. Lesson learned- try to control my greed. Idiots can stay in control of markets very much longer than one would ever expect. So this time around, since the possible win is less than in 2000, I keep my bets smaller, and plan to stay short into the Jan07 expiration, unless I close out profitably in Q4 06.

Regarding investing styles, yes, I have always done it this way. I would be too embarrassed to disclose how little earned income I have ever had. Basically, my retirement was from investing, not saving. As long as I am in good health, I will continue, though probably more conservatively since a big error would cost too much at this point.

I think a young person with a good job and not a lot of money can do fine with any of the standard asset allocation approaches, in that even a big % loss will be swamped by subsequent additions to the portfolio. On the other hand, I believe a young person with an inheritance or other large chunk of money should pay attention to valuation.

A retired person can lose a lot fast, and it cannot be recovered. A retiree with little or no non-portfolio generated income needs to be enterprising and or very conservative. Retirees with secure pensions are in a better place than workers. It really doesn’t matter what they do. They can’t lose their income; they can’t lose lose their job. They can shoot for the moon if they want, and try to accumulate serious wealth. Or they can sleep all day, or travel or become one with the universe.

Ha

 

[wildcat]

Ha -

Thanks for sharing.

 

[brewer12345]

V interesting use of puts, ha. I have started buying the odd put from time to time, mostly on individual names. Been pretty much break-even to a slight loss, but I am climbing the learning trak pretty well, I think. I share a lot of your views on the wider market and I expect to buy some index puts for early '07 expiration, but I am of the opinion that we are likely to see fair weather for another month or so. Gotta figure out whether I want Nasdaq or small cap puts...

 

[haha]

I share a lot of your views on the wider market and I expect to buy some index puts for early '07 expiration, but I am of the opinion that we are likely to see fair weather for another month or so. 

Brewer, you are probably right about fair weather for a while. "Sell in May and go away." Still, for me, if I am right macro, I don't want to try to get too cute on the timing. It will either work or not if I am set up now, or if I wait until May. If I wait I may get my puts cheaper; but I could also have to pay more, or have them high enough suddenly that I would forego purchasing.

 

[wabmester]

The way I evaluate it, US stock valuations are high pretty much across the board.

Details, please. How do you evaluate it and come up with high equity valuations? Seriously.

 

[haha]

Details, please.   How do you evaluate it and come up with high equity valuations?   Seriously.

Haha- the last time I bit on something like this I became embroiled in a tedious discussion that taxed my limited abilities to express myself. See Shiller and PE10, or Hussman and PE where earnings are taken as peak earnings, whether current or past.

Anyway, I am all for everyone having his own viewpoint. We both know that I won't convince you, nor will you convince me. Persuasion is too hard for unpaid work!

Ha

 

[cute fuzzy bunny]

Ok, so under a pair of worst case analyses, things are overpriced?

Morningstar fair value (which I think is a little conservative) says 5% over. S&P500 PE vs historic says a little bit overvalued. Upcoming earnings look pretty solid. *shrug*

 

[haha]

 

[brewer12345]

Actually, aside from rules of thumb which I don't care to stake money on, I find it hard to get to a firm fair value for the market. Each company in the index has financials that need to be torn apart, adjusted, restated and analyzed to get to a ballpark fair value. You can't do that for an index, and to do all the companies index would be a Herculean task (the one where he cleaned out the stables).