Creating my Retirement Portfolio - 1

I am working on restructuring my portfolio to better achieve my goals. Essentially we want no losing years and an average return of 12% (my wife’s order). This blog will be the first installment of my outline and thoughts as to how I expect to get there.

To start with I want a safe distribution. I don’t want a loss year and I don’t want steep drawdowns. Most financial advisors would tell me I am dreaming and that I would be better off leaving everything in money market and bond funds if I cannot accept a losing year. But I am looking at a recent book "The Ivy Portfolio" by Faber and Richardson to give me a roadmap. It is a great book. It talks about how to invest like the top endowments - the Yale and Harvard endowments and avoid bear markets. From 1985 to 2008 the Harvard endowment fund had only 2 losing years of -2.7% and -0.5% which were in 2001 and 2002 and still turned out an average annualized return of 15.2%!! The Yale endowment was even better. One losing year of -0.2% in 1988 and average return of 16.6% from 1985 to 2008.  Wow! What an incredible performance from both fund managers. Now the million dollar question; can I duplicate the endowment performance while keeping risk down?

According to the two authors, you can get close but not quite as good. The difference will be the ability of the endowments to put money into private equity that we cannot. Still, the authors give you various portfolio options that get close, and that is what I am looking at. Ideally we want to get 12% returns but have minimum drawdowns and no losing year. But as I go for more rewards, I would increase my risk and would have greater losses and drawdowns, although the two endowments sure don’t show that.

My thinking is to have a distribution of 50:50 Stocks and stock funds:Alternatives to stocks in my portfolio. Then apply tactical asset management to the individual components. Tactical asset management sounds a lot better than market timing but that is what it is…I will apply my upgrade method to my 401K funds as I have mentioned in previous posts. That means I will have a bias towards bond funds and cash in a bear market.

More next time. Meanwhile let me ask the readers of this blog for their input…what do you think?

President’s Visit

There was news on TV that President Obama visited Cree’s Durham, NC facilities last week. I also have a good friend whose wife works at CREE and so I have followed the stock. The company is doing some wonderful things in the LED lighting area but if you look at the stock chart, the market appears to know something that we don’t. From my last post on CREE the fall in price has continued and has been relentless. The exit signal on my trading system was on January 14^th when the price of the stock was $64. I must admit I was thinking of the upside potential of CREE given all the wonderful things they are doing; but ultimately I trade based on charts and not on feelings and I have not been buying CREE. I could have jumped into my dynamic hedge system with puts on the sell signal. If I had, I would be sitting pretty on some tidy profits but my mind was thinking up. Wrong. The chart was right.

The chart on CREE has now dropped to $34.27 from $64 in 5 months. No long entry signals yet despite the divergence between price and one of the indicators. But it was not strong enough to push price up. I read that some one thought support was around $33.12. There is some support I see around there but the data goes back a while. Perhaps the support will hold and give the stock some strength to re-group.

Ultimately what makes a stock go up is revenue and profit growth and sometimes the growth potential itself is enough. I hope CREE succeeds in what they are doing. Some expect the price of LED lighting to fall significantly as the market has developed and invited more competition into play. CREE will have to stay sharp and demonstrate that their technology can keep improving their profitability and growth but the market must think that their profit margins are likely to erode. Some notable tech companies have been taking a beating lately – look at RIMM. The market thinks the makers of the Blackberry are falling behind and lower revenue and profits only point to shedding jobs and reductions; not growth.

I continue to see why I should use technicals to trade stocks and not my feelings and emotions. It is very hard, no impossible to say how long these downdrafts last. They can grind on for a long time, taking the hopes and dreams of retirement and wealth of its shareholders with them, unless we use technicals to pull out when the trading system says get out. A down arrow means get out. An up arrow says get in. They are not always right but if we can keep the losses low, change direction based on the signals, and then we can ride the long waves up or down to make money regardless of the noise and chatter that is designed to distract us.

Topping patterns

I am still slightly long overall on my portfolio, despite my hedge on my 401K and put positions on a stock. Why might you ask? Because this market has been very strong, and the 50 day exp moving average (ema) of the price which is a red line on the chart below, is well above the 200 day ema which is a black line. In the last 10 years, I have never seen a V topping pattern. Tops take longer to form and it must have something to do with our greed index in that no one wants to miss out on a run up. As soon as we see any signs of upward action after a correction, we pile back on. 

My SPY charts have been saying exit long since my Feb 23^rd posting and I probably could have just gone neutral and dropped out of stocks then. But my 401K system is more momentum based and on a once-a month look. I have already made those picks and I have started adding bond funds back in; but it is still heavier to stocks just now. My SPY put options on my long positions help counter-balance the drops but not enough.

I guess I am expecting this drop will either stop at the 200 day ema or go slightly lower and then bounce back up. The 200 day ema is at 126.24 and is awfully close in value to the previous support on the SPY at 125.28.  I would say we are in for a bounce after that.

The fear index or VIX is at 18.86, which shows hardly much fear at all. It is serious volatility when it gets above 40. Then why are we starting to feel a few pangs of fear seeing the 401K drawdown some and the profit from this year disappearing? Am I more fearful than usual? No – it is mainly because with my systems, I am rarely in the middle of those bad situations where the market is dropping 400+ points and I am holding on waiting for it to be over. I am usually out in bond and cash funds by then. So everything tells me we have not seen any huge drops and that we are still profitable for the year and there is more upside left.  But the charts are weak so there is no need to stay too long.

My trigger to turn very negative will be when the 50 day ema drops below the 200 day ema. Even after that, price tends to try to bounce and break through the 200 or 50 day ema and there are plenty of opportunities to get out using a decent bounce. But one should be very wary on long positions then and I will be posturing to make some money on the down side instead.

Slow Rotation in my 401K

I analyze my 401K funds once per month - during the first week of the month.  I use a momentum type system that analyzes all the funds in my 401K choices and tells me which 3-4 funds I should place my money in. I developed this system a long time back after spending 3 months on weekends analyzing the various methods. I credit my friend Wen for revealing his method to me as my method is basically an offshoot of his – a little simplified version so that I could back test it manually.

Let me point out that I am seeing a slow rotation taking place and a change in momentum is occurring. When I analyzed the 6 month performance of all the funds, not much has changed. But when I look at the 1 and 3 month performances, I see that a rotation has taken place. Funds like Fidelity Growth and Vanguard Explorer Admiral have been replaced at the top by the PIMCO Global bond fund and the Fidelity Govt Income fund.  What does this mean in an actionable item to me?

I am shifting some of my money into the Bond funds and reducing exposure to the stock funds. I am still about 70:30 stock to bond funds; but I also have my stock funds all hedged using SPY put options in a separate R/IRA account. So for now that is the change I am making and will take another look next month. No action in between. It is a slow system that is designed to minimize in and out movements between funds.

The back test results have been extremely good with very little drawdown. I had done the original back testing in the 2002-2003 time frame. Any system that minimizes your losses in 2002 and is able to shift you back into stock funds by late Spring in 2003 is a good system in my books. 2002 was a real bad year for equities and 2003 was a check mark type year; started bad but reversed and took off like a rocket. Similarly, in a really down year like 2008 where markets dropped 30-40% this system only lost about 5%. I was overall flat for the year. And in a year like 2009 it came back and placed me into the leading stock funds that generated about 23% reward. That too because I had taken half the profits early in the August – September time frame as 2008 was a shaky year and I chose to book my profits early in my 401K. I think everyone needs to formulate their own logic and rules for managing money in their 401Ks and R/IRAs. That is after all the largest part of our nest egg, given that home equity has taken a massive beating in the past 4 years. Wish I had hedged my home equity – but that falls in the coulda shoulda and woulda category….

6/1/11 Passed on the market BUY signal

Yesterday I stated that I had a possible buy opportunity if the value of SPY exceeded 134.95. Well, the market started off lower opening at 134.51 and never came close to 134.95. The buy stop signal never hit. Mine is not to analyze the whys.  I will simply state that I passed on adding to my hedged long positions in my 401K.

We remain in a sideways market.