Simple Timing system

[RockOn]

A article on the possible "meltdown" senario. Are we Japan?

How the U.S. Financial Crisis Resembles Japan’s 'Lost Decade' - And How to Play it - Seeking Alpha

I don't subscribe to much of it, but *hit does happen.

If you note in the comments several say it couldn't happen here because the PE was 56 in Japan but is only 18 here. In another Thread someone just pointed out the current Blue Chip DOW PE is now 91....

 

[NW-Bound]

RockOn,

I just read your introduction post. We are somewhat alike. About same age. FI, but still working part-time for some income. My 2 children in college. Yours about to start. You did not say if you are still married. We've been married 28 yrs. DW already ERed. Neither of us have pension. I also have a big nestegg that I saved and pampered my whole life, and do not want to end up like the couple in the movie "Lost in America".

In your introduction post, you showed apprehension of the economy downturn, and the impending bear market. Same here. I also want to have some protection, yet do not want to miss out if the doomsayers turn out to be wrong. In the long run, up to the end of our life, I believe stock market is the best place to be to beat inflation. Else I would have bailed completely. Sounds familiar? Greed and fear, greed and fear...

The problem is we cannot have it both ways. You cannot get 100% upside of the market, without suffering the (hopefully) short-term drop. I always keep around 30% in cash, meaning money market, CDs, and I-bonds because I am conservative. This year, sensing instability in the market, I have raised that cash level to 50%. And I have been at peace with myself.

Say, if the market really tanks, and loses half its value, I would still have 75% of what I have now. Lots of people would be losing their job. Some other's portfolio would be decimated. There may be social unrest, if it gets that bad. Would I be complaining about having 75c on my dollar?

On the other hand, if the doomsayers are wrong (and I pray they are), and the market starts climbing from here, I would still participate in 1/2 of it. That's the price for me being chicken. I can still buy back, but miss out on the early rise. That's the premium I pay for insurance.

I believe the only thing you can do is to raise your cash level until you can sleep at night. There's no other way. I know about the inflation effect, but hopefully, by the year end or early next year, I will know a better place for my cash.

 

[unclemick]

I got my BAC from a series of bank acquisitions. My cost basis is about $9 and I've held it since the mid-90s. I hadn't sold because it had a large capital gain I wanted to not take plus it has a good dividend. It's also well less than 1% of my portfolio. It has been a good reminder why I don't invest in individual stocks anymore. I think it will come through this without having to raise capital or cut the dividend. I think they are just being hammered by rumors and panic. But, what do I really know about this?

I'll just keep on watching the drama unfold.

Yep - out of the DRIP (early 90's also) file and into my VG brokage account - it's not football season yet - so the Norwegian widow gets hit with overwhelming urge to buy lately - so she has to be shook and told to get a grip.

Luckily there is not a lot of loose money lying around right now.

heh heh heh - Even knowledge of balanced index and modern portfolio theory does not prevent those greed and lust attacks. We all know is just hormones. Right? .

 

[RockOn]

RockOn,


I believe the only thing you can do is to raise your cash level until you can sleep at night. There's no other way. I know about the inflation effect, but hopefully, by the year end or early next year, I will know a better place for my cash.

I think there are quite a few of us out there. I keep looking for ideas to get some exposure yet limit risk. Maybe there will be some products coming out for lower risk people, hedged in some manner to limit risk yet get some upside. It is hard for an individual to find vehicles that do that. The boomers are a huge market for those products IMO.

Options might come the closest but I think the costs are really too high plus some of my retirement accounts do not allow options. Vanguards new payout funds were an attempt but they just don't cut it for me. There is no risk limiting mechanism going on there other than the % in fixed. I could do that myself.

 

[haha]

I think there are quite a few of us out there. I keep looking for ideas to get some exposure yet limit risk. Maybe there will be some products coming out for lower risk people, hedged in some manner to limit risk yet get some upside. It is hard for an individual to find vehicles that do that. The boomers are a huge market for those products IMO.

There are 100s of these available right now, and new ones are offered weekly. Go to your broker's website and search under "structured investments" or "structured products". Then you need to develop the ability to evaluate them for yourself, because they are often quite complex.

But they are there, in many different forms.

Ha

 

[RockOn]

There are 100s of these available right now. Go to your broker's website and search under "structured investments" or "structured products". Then you need to develop the ability to evaluate them for yourself, because they are often quite complex.

But they are there, in many different forms.

Ha

Yes but those are too complicated. I have looked at them, there's always a catch. QuantumOnline has most of them.

I just want something simple like, I put in my money, they invest it in a mutual fund which hold a diversified portfolio. I get all of the upside but pay a 3% fee (which they use to hedge) and they protect me 100% on the downside. The plans you mentioned are never that simple. I think that type of plan could be constucted if the amount of money in the fund was large enough to employ option/futures cheap enough. (Maybe only 75% of the upside with no downside and only a 1% fee, I'd have to think what would be my bottom line. Something simple so I and the fund would both fully understand our risk/reward.)

 

[samclem]

T A N S T A A F L

 

[RockOn]

T A N S T A A F L

Ok, what is that again? Something like quit trying to get lower returns with less risk, it isn't possible?

 

[samclem]

If you hear someone saying that they want to benefit from all (or maybe 1/2) of the upside potential, but want to be protected from all of the downside potential, but they don't want to pay very much for this protection, and they want a product that's not very complicated --you might just remind them that "There Ain't No Such Thing As A Free Lunch. (A phrase popularized by the individual quoted in my sig block, BTW)"

 

[ERD50]

I think there are quite a few of us out there. I keep looking for ideas to get some exposure yet limit risk.

T A N S T A A F L

So I'm thinking through a detailed reply, and samclem comes up with that 'succinct' thing that I'm so bad at!

Oh well, I'll go anyway

RockOn, I admire you for thinking through these concerns and searching for solutions. I've done some of it myself, and I seemed to learn that it all boils down to samclem's acronym.

Look at it this way - if you are trying to buy something that can limit risk, there is someone on the other side very willing to sell it to you - at a premium. It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.

So, as HaHa says - there are products out there. I'd bet that if you spent years evaluating them you would discover one thing - the market has priced them fairly accurately.

I remember reading through (OK, I skimmed a great deal of it) McMillan's book on options shortly after I RE'd. There are an almost unlimited number of ways to structure options and the underlying investment. You can 'engineer' your risk profile for any shape you want. But it all comes down to one thing (and samclam said it).

You seem bright, so I think you already know that. So yes, you can limit risk - at a price. That price is not going to vary much, unless you get into some snake oil 'promise', and that price will vary to the high side.

For example, you can buy Puts to limit risk. Except for special circumstances (holding for long term cap gains vs short term, protecting an employee stock option position, or just wanting to hold during a volatile period that you *think* is over reaction), I think that just owning less equities is a better way to hedge risk than buying puts on those equities. No one charges a premium for that.

Full disclosure: I tend to sell puts for the premium - I am a seller of risk.

Fuller disclosure: It's only working out so-so .

But hey, the day you stop looking for a way to squeak out a little extra from life is probably the day you die a little. I try to keep my mind open to new ideas, but I also have a long history of seeing the ideas wither down to...

T A N S T A A F L T

-ERD50

 

[RockOn]

If you hear someone saying that they want to benefit from all (or maybe 1/2) of the upside potential, but want to be protected from all of the downside potential, but they don't want to pay very much for this protection, and they want a product that's not very complicated --you might just remind them that "There Ain't No Such Thing As A Free Lunch. (A phrase popularized by the individual quoted in my sig block, BTW)"

I'm want to benefit from upside, be protected from downside, pay a reaasonable amount for the protection, and want it to be simple.

Maybe that' T S B S A T A A F P S F P (There should be such a thing as a fairly priced simple financial product)

 

[ERD50]

(A phrase popularized by the individual quoted in my sig block, BTW)"

Wow, I didn't know that was Heinlein! I've heard it since forever.

I'm not much of a sci-fi fan myself (I might be if I actually took the time to read some more of it), but I do use the 'grok' reference from time to time. Just because it seems so... perfect.

Thanks for that little tid-bit. Off to wiki 'Mrs. Grundy'


-ERD50

 

[ERD50]

I'm want to benefit from upside, be protected from downside, pay a reaasonable amount for the protection, and want it to be simple.

Maybe that' T S B S A T A A F P S F P (There should be such a thing as a fairly priced simple financial product)

Ok, fair enough. All you need to do is purchase some highly liquid, open market traded protection.

Puts on SPY is one of them.

I should add, 'IMO'. It's not like I'm some expert or anything.

-ERD50

 

[RockOn]

So I'm thinking through a detailed reply, and samclem comes up with that 'succinct' thing that I'm so bad at!

Oh well, I'll go anyway

RockOn, I admire you for thinking through these concerns and searching for solutions. I've done some of it myself, and I seemed to learn that it all boils down to samclem's acronym.

Look at it this way - if you are trying to buy something that can limit risk, there is someone on the other side very willing to sell it to you - at a premium. It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.

So, as HaHa says - there are products out there. I'd bet that if you spent years evaluating them you would discover one thing - the market has priced them fairly accurately.

I remember reading through (OK, I skimmed a great deal of it) McMillan's book on options shortly after I RE'd. There are an almost unlimited number of ways to structure options and the underlying investment. You can 'engineer' your risk profile for any shape you want. But it all comes down to one thing (and samclam said it).

You seem bright, so I think you already know that. So yes, you can limit risk - at a price. That price is not going to vary much, unless you get into some snake oil 'promise', and that price will vary to the high side.

For example, you can buy Puts to limit risk. Except for special circumstances (holding for long term cap gains vs short term, protecting an employee stock option position, or just wanting to hold during a volatile period that you *think* is over reaction), I think that just owning less equities is a better way to hedge risk than buying puts on those equities. No one charges a premium for that.

Full disclosure: I tend to sell puts for the premium - I am a seller of risk.

Fuller disclosure: It's only working out so-so .

But hey, the day you stop looking for a way to squeak out a little extra from life is probably the day you die a little. I try to keep my mind open to new ideas, but I also have a long history of seeing the ideas wither down to...

T A N S T A A F L T

-ERD50

I wish it wasn't so but I have to agree with you. I went through the option ideas many times, they just don't seem to be worth it. Maybe if a financial institution really wanted to create a large volume low cost product, a few financial wizards could come up some simple reasonably priced risk limitation products. It would be a huge market for them, kind of like how Vanguard took over parts of the low cost Mutual Fund arena. Maybe it's not economically possible or maybe financial companies are still too greedy to make it possible. I will keep waiting.

 

[ERD50]

It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.

OK, it's probably *really* bad form to quote yourself, but....

1) I've just enjoyed a fairly strong 750mL bottle of some of my 'hop monster' homebrew (mmmmm)....

2) The deeper meaning of what I just wrote sunk in ( see #1) ....

Otherwise, they would find another place to invest their funds.

So, if they think taking on your risk is a better investment than anything else out there, you gotta wonder - is your risk all that bad?

OK, I'll temper that statement a bit. I understand, you are trying to limit risk, not get the highest return possible. But I still think that helps keep it all in perspective.

Oh, and to answer the recent post - yes, I think SPY puts are that product. I honestly think that is as good as it gets. And it ain't that great, it's OK.

-ERD50

 

[RockOn]

Ok, fair enough. All you need to do is purchase some highly liquid, open market traded protection.

Puts on SPY is one of them.

I should add, 'IMO'. It's not like I'm some expert or anything.

-ERD50

Buying straight puts on SPY is simple, it costs an arm and a leg though. Probably quite a bit more than the average SP % upside in an average year, depending on how tight the strike price is.

Think of it this way, If I said to you, I will give you all my money and all you have to do is pay me 5% (or whatever) a year guaranteed and give me my money back if I want it back (with maybe on few restrictions on the timing of returning principle). You can keep every single dime you make over my guaranteed amount. From what I read in many places, that should be a great deal for you and a very bad deal for me. Yet nobody is offering anything like that.

I might be wrong but I see products like that coming out in the future.

 

[unclemick]

I wish it wasn't so but I have to agree with you. I went through the option ideas many times, they just don't seem to be worth it. Maybe if a financial institution really wanted to create a large volume low cost product, a few financial wizards could come up some simple reasonably priced risk limitation products. It would be a huge market for them, kind of like how Vanguard took over parts of the low cost Mutual Fund arena. Maybe it's not economically possible or maybe financial companies are still too greedy to make it possible. I will keep waiting.

1929 Wellington, 1970 DRUM ROLL Please pssst - Wellesley, 1976 500Index, 1992 Balanced Index, etc, etc, etc.

They keep trying.

heh heh heh - You need to read a little Angus Madison on how long various Nations/stock markets have lasted over the last century. 'Rich as an Argentine and I heard before 1949 The Egyption market was 'the place to be'. . Inflation indexed Icelandic bonds?? .

 

[RockOn]

1929 Wellington, 1970 DRUM ROLL Please pssst - Wellesley, 1976 500Index, 1992 Balanced Index, etc, etc, etc.

They keep trying.

heh heh heh - You need to read a little Angus Madison on how long various Nations/stock markets have lasted over the last century. 'Rich as an Argentine and I heard before 1949 The Egyption market was 'the place to be'. . Inflation indexed Icelandic bonds?? .

I might just have to put all of my money in pssst Wellesley, it has a strong following and that can't be all bad. When will I learn.

 

[ERD50]

Buying straight puts on SPY is simple, it costs an arm and a leg though. Probably quite a bit more than the average SP % upside in an average year, depending on how tight the strike price is.

Think of it this way, If I said to you, I will give you all my money and all you have to do is pay me 5% (or whatever) a year guaranteed and give me my money back if I want it back (with maybe on few restrictions on the timing of returning principle). You can keep every single dime you make over my guaranteed amount. From what I read in many places, that should be a great deal for you and a very bad deal for me. Yet nobody is offering anything like that.

I might be wrong but I see products like that coming out in the future.

I'll disagree. SPY puts don't cost an arm and a leg, they cost what they are 'worth'. It's a liquid, free market. If they truly cost an arm and a leg, I'd be making a killing by selling them, and I'm not.

Here's a little exercise for you, one that I inadvertently did many times in my quest - Use options to create a totally 'risk-free' investment. It is 100% do-able with options. What I think you will find, is that the best you can get from your 'risk-free' investment, is something close to what a 'risk-free' investment (treasuries) for that same time period would give you ( minus the transaction and spread costs).

What did samclem say? T A N S T A A F L T

-ERD50

PS - but if you find it, PM me!

 

[RockOn]

I'll disagree. SPY puts don't cost an arm and a leg, they cost what they are 'worth'. It's a liquid, free market. If they truly cost an arm and a leg, I'd be making a killing by selling them, and I'm not.

Here's a little exercise for you, one that I inadvertently did many times in my quest - Use options to create a totally 'risk-free' investment. It is 100% do-able with options. What I think you will find, is that the best you can get from your 'risk-free' investment, is something close to what a 'risk-free' investment (treasuries) for that same time period would give you ( minus the transaction and spread costs).

What did samclem say? T A N S T A A F L T

-ERD50


PS - but if you find it, PM me!

Very good points.

Are you selling them naked? That is the best option idea out there I think, but it has it's black swan risks. It's the best idea mostly because options are overpriced IMO.

I agree with the risk-free investment return.

 

[samclem]

Very good points.
How about my idea of I give you my money and you give me 5% a year guaranteed and keep the rest. You commit to do it until I want to quit, and I agree not to quit except every 10 years or so. What's wrong with that, tons of people think I would be the fool. Why can't I find that in the market?

You can do that right now, today. Get a 5 year CD and it will be insured by the government (not just ERD 50, me, or a private insurance company). They'll pay you 5% and you can stop obsessing over this.

See Discover Bank in Newcastle Delaware.

CD (Certificate of Deposit) Rates - Top 25 Highest CD Rates

There. Done. What else do you want--a chocolate sundae?

 

[RockOn]

You can do that right now, today. Get a 5 year CD and it will be insured by the government (not just ERD 50, me, or a private insurance company). They'll pay you 5% and you can stop obsessing over this.

See Discover Bank in Newcastle Delaware.

CD (Certificate of Deposit) Rates - Top 25 Highest CD Rates

There. Done. What else do you want--a chocolate sundae?

I figured that out and deleted the comment. You beat me to it. Ok 5% isn't enough without any inflation protection or any other upside. Sorry I need 6.5%, can you do that with a level of safety?

I want the rate guaranteed for as long as I want it also, CD's have reinvestment risk.

 

[samclem]

RockOn--For the record, the part I quoted was in your post. You've subsequently edited out your stated request for a %5 guaranteed return (after provided a place where you could get it. What's the new request going to be--belly dancers on your birthday?

 

[samclem]

no mas

 

[ERD50]

Very good points.

Are you selling them naked? That is the best option idea out there I think, but it has it's black swan risks. It's the best idea mostly because options are overpriced IMO.

I agree with the risk-free investment return.

How about my idea of I give you my money and you give me 5% a year guaranteed and keep the rest. You commit to do it until I want to quit, and I agree not to quit except every 10 years or so. What's wrong with that, tons of people think I would be the fool. Why can't I find that in the market?

There is a general misunderstanding of 'naked puts'. Technically, yes I sell them 'naked', but I always have the cash to buy the stock at the strike price. I think it is more descriptive to call them 'cash covered' puts. This is in an IRA, and it is the only way you can do it in an IRA. Funny thing is, some institutions won't let you. If anyone should understand that a cash covered put is no more risky than a covered call, it *should* be a financial institution.

There is (slightly) less 'black swan' risk than holding the stocks. I generally sell the puts at a strike below the current stock price, and get a premium to boot. So my potential loss is a few % less than just holding the stock. But it ain't your grandma's money market.

I won't say that options are 'over-priced', they are priced at what the market will bear. Yes, there is a premium to pay to buy an option. But if it was 'over-priced', more people would jump in and sell them, and that would drive the price down... supply/demand.

In theory, you should be able to make good money selling options. Just like a casino makes good money selling the option to get rich. In practice, I think you need to be diversified across maybe a hundred underlyings , and I can only afford to be diversified across a dozen. So, I still get hit with the downside risk, and maybe not enough diversification to balance that out with the premiums.

But I try. 'Testosterone trading', I think unclemick calls it.

-ERD50