An Interesting Take on Investing

This is an interesting take on investing offered by professional manager Mohamed El-Erian, the CEO and co-CIO of Pacific Investment Management Co. (the world's largest bond investor) in a June 11 interview with Jennifer Schonberger of The Motley Fool. In the interview he discusses the three elements of his new approach to investing for today's markets.

"The first element of the strategy is to be forward-looking rather than backward-looking.

'That speaks to asset allocation and geographical exposures,' El-Erian said.

The second element is that the road forward will be mired with sharp turns and bumps. As a result, investors must position their portfolios to benefit from cyclical trends.

'That bumpiness constitutes an additional challenge for buy and holds, which is to make sure that people can in fact hold -- because when you have a very bumpy journey, there is a temptation to stop holding at the wrong time,' he said.

'So there has to be a much more responsive element of the portfolio that is looking to capture not long-term secular and structural trends, but looking to catch shorter-term cyclical and technical trends,' he said.

The third element of El-Erian's plan is conscious risk management, which gets at diversification. In the past, El-Erian said, one of the problems with the buy-and-hold strategy was that it encouraged people to think that diversification was sufficient for risk mitigation.

'That's no longer the case. Diversification is necessary, but it's not sufficient,' he said. It's necessary because it's the best method for mitigation of risk, but it's not sufficient because, as El-Erian points out, you can have years, such as last year, in which all the correlations go against you. Therefore, he said, buy and hold needs to be supplemented with much more responsive risk management.

'It's not enough to say I'm going to be able to buy and hold simply because I'm diversified. One has to go a few steps further and ask what does it look like when I'm actually buying and holding?' he said.

Building on that, El-Erian said a portfolio should be constructed such that only part of it is held for the 'long term,' which he defines 'long term' [sic] as three to five years, max -- because it's difficult to forecast what happens much beyond that."

Two Keys To Recovering Your Nest Egg

Some Statistics I find interesting:

• 35% of those 45-54 have stopped putting money into retirments accounts
• 25% have withdrawn funds from their retirement accounts
• 56% have postponed major purchases
• 24% have postponed retirement plans

The boomers are going bust. Why? Because they thought they had little control over their retirement accounts, and what control they did have, they just didn't know what to do about it.

That's very disturbing to me, and part of the reason I do what I do.

Our Forecasts showed a decline ready to begin back in August of 2007. Long and intermediate cycles were ready to roll over. When that pattern develops, if you can't buy puts, or buy inverse ETF's which will actually make money when markets decline, THEN YOU MOVE TO CASH. Plain and simple, you get out of long or growth funds and move into money market or government securities.

Millions of investors needlessly gave up years of gains in a few short months because they relied on "advisors" to tell them what to do. Big mistake.

Those advisors, are for the most part, paid only by money under management. When you move to cash, it is no longer under management. Where then is their motivation? To keep you in funds. That seems criminal considering what has happened to peoples life savings in the last two years.

Retirement accounts could have been spared. Life savings should have been protected.

In a survey we conducted in April, 95% of our users made thousands (some hundreds of thousands) of dollars over the past twelve months. (I'm going to have to work harder on the other 5%). The only reason they did so, is because we showed them what to expect, and they took action.

If anyone is serious about making money, those are the two keys: learn how to read the markets (forget about individual stocks, all the fundamental information is just padded reporting anyway), because as the markets go, so goes your portfolio. And when you understand its behavior, do what's required, take action.

Anyone who just turns their money over to someone else, especially some advisor who doesn't or can't trade the markets both up and down, and has a track record supporting it, isn't worthy of your time, your trust, and definitely not your wallet. You will do better than ANY of them on your own, IF you will learn and apply those two keys.

Steve

Can't Wait for Wednesday

I received a funny email today. You get them all the time, too. Sales pitches from "gurus". This one was titled "Is the Market Rally Over?" I turned to Steve and laughed out loud.

Of course the rally was over--last week. Before the market opened Friday, Steve indicated as much in the Commentary. After Monday's triple-digit loss, we saw another 100 point drop in the Dow today. The NASDAQ was off 20 points. Both indexes are down more than 3% since the opening bell Monday morning.

So what's next?

The long-term indicator is still rising. The intermediate indicator is in the upper reversal zone. Both the short-term and momentum lines have been in phase, lock-stepping deep into the lower reversal zone.

The new chart Steve included in the website shows our 3 critical moving averages (5, 30 and 50) along with volume. This should be VERY useful in helping us visualize the written recommendations:

Today the market closed down just below the 30-day moving average. Will the short-term and momentum cycles set up for a nice bounce? I'm looking forward to the market open. It should be a great trading day Wednesday.

New Chart

Steve just added an awesome new chart to the Commentary page.  Check it out.

Steve Calls It

The Dow Jones Industrial Average and the NASDAQ were each down more than 2% on Monday. If you've been following Steve's Market Forecast Commentary, you saw the pullback coming. 

In his Commentary before the market opened Friday morning, Steve wrote, "I'm expecting to see another pullback to the 30 DMA [30 day moving average] in this next short term cycle decline. That is likely to develop next week after the short term cycle peaks in the next session or two." 

And following up in Monday's Commentary he said, "Short term cycles were topping out on Friday and will begin rolling over this week...Don't be surprised by a pullback that resembles 6/11."

"Therefore, continue to use stops on intermediate term trades underneath a 21 or 30 day moving average. You can also continue to trade for bearish profits short term by watching the intra-day ETF's using the 8/8 crossover averages which have been very effective in these faster momentum/short term moves."

Hope you weren't on the sidelines during this opportunity. Use the DXD and QID, which are inverse ETFs we use to trade the Dow and NASDAQ, respectively, on down moves. At the close on Monday the DXD was up over 3% from its Thursday closing price. And the QID was up almost 5% from its Thursday close.

Steve put it this way in today's Commentary:  "Cycle analysis is the one tool in our technical arsenal that is designed to measure 'time', and the one tool that lets us predict when turns are coming due."

Update

With our main servers down in California, I am posting here for end of day Monday. Steve

The Times They Are A Changin'

At The Market Forecast we advocate and teach that any person who is educated and committed to trading properly with the right information can generate market-beating results. Unfortunately, most of the investing world has simply taught individual investors to settle for whatever results a professional money manager gives them. Worse, "buy-and-hold" investing has left many in financial ruins during the most recent bear market.

When the S&P 500 loses money over a 10-year timeframe, it's time to question old assumptions. A long-time advocate of buy-and-hold investing, The Motley Fool's Tom Gardner recently wrote:

The Motley Fool has been associated with long-term, buy-and-hold investing since our founding in 1993. And as co-founder and CEO, I'm writing to say that, for many people, long-term investing simply doesn't work. You read that right. Many investors today are wrong to anchor their stocks to an average holding period of three to five years or more.

from "Long-Term Investing Doesn't Work" June 5, 2009

And over at the Wall Street Journal, these two items describe the changes shaping the investor world:

The ups and downs of the market are prompting more retail investors to abandon buy-and-hold strategies in favor of opportunistic trading.

"The problem I have with the buy-and-hold strategy is that it's a bull-market strategy," says Matthew Tuttle, a financial advisor in Stamford, Connecticut. "In the bust, you give all your profits back."

from "More Investors Say Bye-Bye to Buy-and-Hold" April 8, 2009

Buffeted by steep declines in stocks, many bonds, commodities and real estate, many advisers are questioning their faith in long-standing investment principles.

Two prominent networks of financial advisors--the National Association of Personal Financial Advisors and the Financial Planning Association--are sponsoring panels at conferences this year on the subject of rethinking conventional approaches to investing and building client portfolios.

"There's a seismic change in the market," says Will Hepburn, president of the National Association of Active Investment Managers. "The people who were buy-and-hold-oriented lost a lot of money, and they don't want to do it again."

from "Advisers Ditch 'Buy and Hold' For New Tactics" April 29, 2009