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What's Working Now?
By Lyle Wilkinson
Financial markets are not static. What works now might not work tomorrow. Sometimes what worked in the past will start to work again. Market forces push prices thru the theoretical correct price and back from one side to the other of this correct price. Accepted calculation of theoretical correct price based on discounted future cash flow, is easy to understand. However it is not fool proof as future earnings and appropriate discount rates are estimates. It's not easy for an individual to wade thru all the info available and make money on stock equity.
I've been increasingly enthused about ETFs, Exchange Traded Funds. In DIY Portfolio Management, I recommend SPY* or a mix of a few large ETFs as good strategies for those who don't want to invest a lot of time or assume a lot of risk. The appeal of holding ETFs comes from low expense ratios, diversification, and tradability. ETF expense ratios range from .2% to a high of .95%. ETFs are baskets of equities, usually designed to mimic the performance of some index, thus reducing risk of holding individual equities. ETFs trade all day long, like stock equities.
ETFs are becoming increasingly popular. There is more and more info about ETFs on the net, just google ETF. In 1993 there was just one ETF, and by April 2006 www.ETFconnect.com listed 234 ETFs.
Starting in 2004, I've been paper trading Trend Regression Portfolio Strategies using models with 50 ETFs. Paper results looked good with these accounts beating the market.** I switched one of my real money accounts to a traded ETF strategy in March 2005, and expanded to a second account in November.
The oldest account grew 29% from 3/28/05 to 4/1/06, compared to a 13% return for SPY. The newer account grew 12% from 11/7/05 to 4/1/06; SPY grew 7% in the same period.
These strategies are funded at FOLIOfn. This broker works for me because I focus on managing portfolios rather than investing in individual equities.
My oldest funded ETF account is a mix of a daily price and a weekly price models using the same 50 ETFs. The ETFs were picked primarily based on length of trading history. The newer account adds continuous holding of 6 large ETFs.*** The total number of ETFs held varies week to week, from 9 to 12. Both accounts are always 100% invested. The newer account blends 'buy and hold' and Trend Regression Portfolio Strategies in a single account.
The performance of these strategies has been good relative to SPY. I don't know how long it will last. My experience has been that models work for a while then fade. I'm not sure yet whether it is because the models just stop working or because my focus shifts. Anyway! The point is not that the outstanding performance of these ETF models makes them terrific strategies, but that it is possible to beat the market. Remember, beating the market takes work, discipline, and acceptance of risk. For most individual investors busy with their lives, it is probably best to lock in a market return by buying SPY.
*SPY is the ticker for S&P Depositary Receipts the ETF designed to capture the total return of the S&P 500 index. SPY mimics the S&P 500 index by holding stock in all 500 companies in the index in the same proportions as the index itself. SPY is the oldest ETF (inception 1/29/1993), the largest ($51 billion net assets), and is the second most actively traded (62 million shares per day average).
**I'm defining the market as the S&P 500 index. SPY has a beta of 1. An account with a higher total return than SPY is beating the market. SPY is a pretty broad measure of the US market. If you are thinking global you can use a broader index. I use one created using a paper-trading account with 5 ETFs rebalanced weekly. This index gained 19% between 3/28/05 and 4/1/06. The actively modeled/managed ETF account's gain on market depends on how you define the market.
***The six large ETFs are SPY (for broadness), DIA (for tradition), QQQQ (for tech), EFA (for international), EWJ (because my wife is Japanese), and EWC (because I'm Canadian).
About the Author
Lyle Wilkinson, investor, trader, author, MBA
Helps individuals learn to self direct their stock portfolios.
Book, e-book, PowerPoint "DIY Portfolio Management"
http://www.diyportfoliomanagement.com
joe@diyportfoliomanagement.com
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| Some other articles by Lyle Wilkinson | Retirement Planning Wars
Through our working lifetime, saving forces battle the ‘live life’ forces. In our family sometimes saving won and sometimes spending won. As retirement approached we had equity in our home, a small nest egg, and no ...
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