Monday, February 11, 2008

Portfolio Tracking

DRAFT

Taking the S&P500 as the benchmark, we began to understand the dynamics.....



We are using ETFs with at least track record of 5 years. In the above instance, we track EWA and note that the average annualised return is 30%, standard deviation is 11%, sharpe ratio is 2.4, correlation coefficient is 0.8 and beta is 1.4

Likewise, we track DIA, EWS, EWH, EWM, FBIDX, FIEUX, XLF, XLE, XLB, ABX and IXJ:



























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Keywords: quality, value systems,
trust, domain knowledge, technology, networking, maven traps, speed of trust, lifestyle




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Sunday, February 10, 2008

Portfolio Management: Taking the Plunge

In the month of January, the market has been very choppy....... It is a widely held notion that a 20% decline off the peak of the key index ( e.g. Dow ) would place an economy ( US in this instance ) technically in recession......

It is a question of whether we are better off in taking a position of buy-and-hold or exit the market and retain cash.

It has been said that it will rather difficult to time the market. Generally this is true. However, let us try to understand the market psychology.

Here is one view:

Why small investors should hang on to their holdings in times of turmoil.

It's common in times of market swings to hear financial advisers warn that trying to time such turbulent markets is a fool's game.

One minute, the market is struggling with what could easily become full-scale capitulation, with the Dow industrials down more than 300 points and everybody from top economists to bartenders and cabdrivers criticizing Fed chief Ben Bernanke for slashing interest rates by three-quarters of a point on Tuesday. The next moment, the bulls are running like it's July in Pamplona, fueled by the latest and greatest plan to bail out Wall Street.

At some point, when they do turn, it will be fast and hard


We need to understand the underlying motivation. Because of the issue of moral hazard, certain key players in the market have gone overboard, and hoping that when they get into trouble, there will be a bailout.

However, once the market is used to such a notion, it will encourage more wayward behaviour that will result in wilder swings. On one hand, the average investors will be too afraid to do anything and will hang on to their positions but on the other, a certain percentage will capitulate causing prices to fall off sharply, raising concerns amongst regulators. Subsequent actions taken by the regulators become predictable - allowing certain segments of the market to make tremendous profits.

Here is another take
Since the current problems of the U.S. economy look like a combination of 1990 and 2001, the shape of this episode of economic distress will probably be similar to that of the earlier episodes: even if the official recession is short, the bad times will linger well into the next administration.

How severe will the distress be? The double-bubble nature of the underlying problem — a housing bubble and a credit bubble combined — suggests that it may well be worse than either 1990 or 2001.

And some highly respected economists are issuing dire warnings. There has been a lot of buzz about a new paper by Carmen Reinhart and Kenneth Rogoff that compares the United States in recent years to other advanced countries that have experienced financial crises. They find that the U.S. profile resembles that of the “big five crises,” a list that includes, for example, Sweden’s 1991 crisis, which caused the unemployment rate to soar from 2 percent to 9 percent over a two-year period.


If we look at the performances of S&P500 for the periods from 2000 through 2002, we will note its dismal showing i.e. -9.8%, -12.1%, -21.6%.

Thereafter, the annualised returns were 23.8%, 10.7%, 4.8%, 15.2% and 5.1%. Emerging markets for the same periods have done better, and generally have higher betas.

If inflation is a concern, it may be well worth an attempt to shore up the portfolio with non-monetary assets, REITS( non-residentials ), TIPs. This may work if the recession is mild and short. However, if the recession is protracted, all bets are off.

Can it be said that a consumption-driven economy is less likely to generate productivity gain as oppose to one that saves, work hard in producing goods for sale.
Are the differing trajectories of key indices ( e.g. SPY, EWA, EWS, INP, EPP ) a reflection of this notion.

Well, US consumption will remain the key locomotion, and for those wishing to thrive in such an environment, must be willing to work hard, generate surplus wages/profits, and also wisely invest the surpluses.

Inflation will continue to be an issue that we have to address moving forward. This is because of competition for raw materials by emerging economies. These economies are export-driven as well as having a growing middle-income class that seeks to emulate the more developed economies in term of consumption.


Keywords: quality, value systems,
trust, domain knowledge, technology, networking, maven traps, speed of trust, lifestyle


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