Friday, January 6, 2012

Portfolio Management

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As I said in my comment to my previous post, Anonymous’ questions raised a number of interesting points for me.  I will address them in the order they were raised.

First,  XTR (iShares Diversified Monthly Income Fund) is a fund of funds.  What that means is it costs me more to hold this particular fund.  Given the performance of XTR over the past three years, though, it would have been worth it.  Despite the (Canadian) diversification (equities, bonds, and REIT’s) the correction in 2008 was still around 50 percent.  This is why I believe even long-term holders should have a maximum loss, or stop loss at which they can take their money out of harms way. (and, why I don’t use mutual funds).

A Signal
I have misled Anonymous into thinking my approach using XIU (iShares TSX 60 ETF) is to put everything into that ETF and watch the 200-day moving average.  My stop loss is when the price of XIU crosses the 200-day moving average from above.  That is my signal to stop out of any Canadian equities at that point in time (if I haven‘t done so already).  This would not necessarily work so well for XTR since it is a blend of stocks and bonds (albeit Canadian ETF’s).  For XTR, I would simply use its own 200-day moving average as an indicator to begin stopping out.

How Much Is Too Much
If I didn’t know much about stocks or investing and was comfortable in thinking the returns given by the TSX are likely to be okay, I would not have a problem in putting everything into something like XIU (as long as I had a stop loss in mind), just not everything at once.  Jim Cramer seldom recommends ETF’s, but he does suggest doing one hour of homework per week for every stock we own.  On that basis, not many of us are going to have the time to manage twenty stocks.  XIU has sixty of some of the best companies in the world!  I know the TSX is under-represented in a number of sectors, but I, personally, would rather that than assume the risk associated with companies in emerging markets, and/or having to deal with the currency exchange.
Size Matters
I do like the suggestion by Anonymous to divide my portfolio into four, or five equal parts (personally, I subscribe to the 80/20 Rule).  I know some people advocate varying position size, but I make them all the same (in dollars) and stop out as soon as I begin to take a loss.  I use different markets (through Canadian ETF's),  seasonality (, and technical analysis (, to determine what I want to invest in, and since I will take profits when I can, I never feel the need to be 100 percent invested all of the time.  The markets go up, down, and sideways.  I never try to get in early to wait, but normally, only put my money into newer trends.  I say normally because sometimes a trend will appear to break, and then, later, resume again.

Moving Averages
I would not, however, use moving averages less than 200 days as a signal to get in, or out.  For me, I just don’t see the reward.  For whatever reason, the 200-day moving average is a turning point for the market, and stocks in general.   Using a moving average of a lesser duration tends, too often, to result in getting out at one point, and getting back in again at a higher one - not what I want to do.  My own preference is for trend analysis - I take profits as the longer term trend grows tired (especially if it exceeds my target), and begin looking for the next one.

Again, thanks to Anonymous for the questions.

Anyone wish to share their point of view?  Does this bring up any other questions?

1 comment:

  1. XTR became a fund of funds only in Sept 2010; before that it was tracking an Income Trust Index, hence 50% drop. A similar ETF of ETFs with a longer history is CPD. The drop would have been around 30% as per below (distribution re-investment is included). Select 5 year chart


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