The email just below got me back to work after a pause. My view on the market generally remains the same as a month ago: namely we are competing a correction and will go higher again. Sentiment and breadth remain ghastly as they always are after plunges. It is the goal of politicians in the US and many others aboad to create pessimism in the US in this time frame and for most of the next two years, and we see this reflected in market sentiment. As long as we keep our eye on the economy and market technicals, the professional pessimists should not affect us too much
Now some further questions and comments on investment portfolio composition which is extremely important to those over 35-40 years of age
I just discovered your web site and see that you are wrestling with the same issues that I have, preservation and reduced volatility while still getting a reasonable rate of return (enough above fixed income to incur some limited risk. I skimmed through your commentary and see that you own many of the funds that I do, BEARX, PRPFX, TSMFX, FAIRX, SGENX, HSGFX, etc., intended to deal with the risk/return problem.
The two major differences that I detect is my reluctance to use bond funds (I am in money markets and very short term CD's), and my focus on non-U.S. funds as a hedge against currency risk and erosion of the U.S. economic power which seems to be accelerating. So I use the bear fund to counterbalance equities rather than just focus on funds like fairx and sgenx (I used to think Tice was a nut case but have come to respect his skills and ability to have this fund post a positive return over the past 2 yrs in the face of a rising market.
Good to hear that you have discovered some of the same funds.
Bonds are the classic portfolio diversifier and volatility reducer, but the last two and one-half decades have seen a tremendous bond bull market which is likely coming or has come to an end. Thus bonds will not retain as much power to reduce volatility going forward. However, I believe that bond fund people and those who handle the fixed income portion of balanced funds will deal with that issue by reducing duration and by outright increases in cash holdings. I think they will do that better than I could by guessing about timing bonds and/or by switching between bonds and cash.
I have chosen to spread the bond risk around amongst several excellent bond houses both inside balanced funds and in free standing bond funds. Vanguard/Wellington's Wellesley Income (VWINX/VWIAX) is a favorite core balanced fund for tax-deferred accounts. They really concentrate on yield first. Then there is Dodge & Cox Balanced (DODBX) whose bond people are absolutely first class with an emphasis on bond volatility control for capital preservation. T Rowe Price's Capital Appreciation Fund (PRWCX) has an almost identical total return as DODBX since 1988. PRWCX uses convertibles and cash as their swing choice instead of bonds. (So does Berwyn Income (BERIX) which I have in some smaller tax-deferred accounts.) I regard these three or four funds together as a unit and as the core for most portfolios. Their top 25 stock holdings do not overlap a lot, and their fixed income approaches vary. So there is diversity amongst them even for a balanced group.
Hussman Growth (HSGFX) is a hedge during down markets and is a money market fund (due to the implied interest rate they earn when fully hedged) during later phases of bull markets. I have had HSGFX as well as FAIRX in some tax-deferred funds but that doesn't make a lot of sense, so I am gradually moving all of FAIRX and part of HSGFX over to taxable funds without offending the Vanguard and other funds' "anti trading police". I like FAIRX's large cash holding which they justify for a different reason than simple volatility control. As you know they like cash so they can pounce in size on values when there are market declines. This is also SGENX's view. (I'm watching to see why Charles de Vaulx has suddenly resigned at First Eagle's SGENX and why Jean-Marie Eveillard came back out of retirement to take over again
Another bond funds approach is to go with multi-sector funds, or funds of funds, from really good bond houses. PIMCO is well-known for them, but I don't yet have any of PIMCO's funds. Pimco Total Return (PTTRX) is now so huge that it is essentially a Eurodollar futures fund to cope with that size. The Eurodollar futures are a huge market. I like Loomis Sayles' LSBDX and T Rowe Price's RPSIX as a high yield and a low yield fund of funds respectively, both with very long records. However, barring times of recession, bonds are subject to declines over the next one to two decades, so I am not loading up on these free-standing bond funds at this time. It's awfully hard to beat 5.1% at Vanguard's Prime Money Market Fund (VMMXX) right now. Another potential negative for more exotic bonds in corrective market phases is that multi-sector high yield funds act more like convertibles or even like stocks than like true bonds. This is true as well for non US high yield corporate and emerging country sovereign bonds.
I am lighter in exclusively non-US funds than you are. Foreign funds have tended to be far more volatile than US funds historically. Perhaps that will be less so in the future. However, I discovered that my conservative balanced funds have 5-20% foreign stocks in them, and most US-domiciled mega caps have substantial international earnings. My goal is to beat inflation/currency erosion over time, and I think good US stocks with some foreign blue chips will do that. I do own SGENX and small pieces of some of the low cost Vanguard International Value (VTRIX) and Emerging Markets (VEIEX) and also Artisan (ARKTX). Also I own Vanguard's VGHCX (health care), VGPMX (metals and mining), and VGENX (energy) which are all fairly heavy in foreign stocks. Together with VGSIX (US REITS) these sector funds are about 8-10% of total portfolio. If I put all the funds above into the mix, my non US holdings are actually about 15-20% of total portfolio. (Morningstar has a portfolio analyzer which will tell you what percentage of your total fund holdings are in various sectors, sizes and country categories.
I'm with you in my former opinion of Tice. But I do understand his marketing needs, and I agree with you that his returns have improved with a lot of help from the gold market compared to his record from 1996 to 2000 when gold, and most commodities, were in the last nasty phase of their long Kondratieff Wave bear markets. Some research with MarketTrak's long term portfolio averaging capability (see below) convinced me to reduce my HSGFX committment and increase that of BEARX. There are several reasons. One is BEARX's excellent small gold stock portfolio component. A second reason is that the low volatility approach with deep value stocks, cash, and bonds misses true growth spurt periods such as we had in the late 1990's and many times before in earlier decades. By matching BEARX against long term growth winners like OAKLX or newer FAIRX and RYSEX, one can achieve higher returns with lower volatility. So I have been slowly coming around to that same view which you mention in your email. It is another way to capture a different market segment's returns without the larger draw downs normally implicit in growth stocks and mid and small caps. I won't let this approach take a large portion of my portfolios since income is essential, and growth stocks do not throw off large dividends. (Actually, BEARX had a 3.4% cash distribution last year at year's end, so as with HSGFX's 3.8% there is an income component.
I finally subscribed to FastTrack's daily service several months ago. For some years I used the free tools at their website (http://www.fasttrack.com), but they finally wised up and cut their free tools back. They have the best data base I could find, although it only goes back to 1988. Their fund and ETF data is total return with all dividends re-invested. If you know of any other really long term data bases on mutual funds, I'd be very interested. Apparently the SEC won't let very old funds advertise or even mention their returns much beyond ten years, so it's hard to get older data.
In the long run I agree with your views on the dollar and inflation, but it is very hard to use most true inflation hedges without introducing a lot more volatility than I want. So I am doing it in "wimp fashion" and at the edges as I get into the draw down phase when I will live on the output of my investments. I formerly had very large gold mining, agriculture, real estate, and energy positions, and if I were 30 years old I still would. I do have a fully paid and stored gold bullion position (10-12% of assets). I keep thinking I should sell it and put it into something like CEF which those who come after me could handle more easily. But I hate to buy CEF (Central Fund of Canada) at an 8-10% premium to NAV, so I am waiting. VGPMX and VGENX are excellent metals and energy funds, unfortunately closed to new investors, and as mentioned BEARX is a "stealth" gold fund. Permanent Portfolio's PRPFX is an alternate which is very tax-efficient for long term holding, although the fund company is very small, as with Hussman: almost one man band companies. I used to trade currencies but it seems too much like work as I get older.
Thanks for the ideas and the impetus to me to get back to work!
This 2CS chart was put together by a friend who has graciously permitted me to post it. The 2CS is the five day running total of the daily CBOE total p/c ratio times the daily VXO. Each is a daily datapoint except the last point which is the first hour today.
Whenever a market hasn't corrected an advance for quite a while, either on a daily or weekly basis, and VIX/VXO are low, smart people get nervous. The market is then susceptible to a sharp decline due to technical deterioration, fundamental deteroration, or news, and that's what happened last week on China, Greespan, and US"subprime" mortgage news.
I wish I had paid greater attention to "sentiment divergence" which I have written about before. Both the 2CS of bearish sentinment and the one day sentiment oscillator became somewhat bearish between February 5 and February 23. It's always a tough call whether the divergence implies a near term decline is looming or it just represents persistently wrong-headed bearishness. But I have put up a new phrase on my monitor's frame along side Gilda Radner's "It's always something." The new one reads: "Sentiment divergence happens!"
Most US domestic stock mutual funds were down 4-5% and US mutuals holding non US stocks were down 5-7%. My total low volatility portfolio was down just 0.93%, so the program is working. I hasten to add that the low volatility approach of necessity also reduces gains in rising markets.
The week ended with the 2CS over 108 and with the one day sentiment oscillator having put in two days with readings under 4! These indications mean we should have a decent rally this week. After such a startling decline it is almost routine to retest the lows since the bears have more money and confidence and wish to press their luck further. Also some bulls who missed the exit signs will look to get out.
Technical indicators I follow remain bullish, so I feel we will see new market highs in six weeks or maybe far less time. Increased market volatility works both ways. I remember when people were predicting an imminent crash in 1996 to end the bull market as volatility rose above VIX 15. Primary tops of long bull markets do not end with VIX under 10, but minor or secondary tops may.