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Best Money-Making Ideas for 2012
By William Parmenter, editor
Gunter Hagen’s Mutual Fund Group held an interactive seminar with 17 attendees on The Three Best Money-Making Ideas (Funds/ETFs) for 2012 at 10 a.m., Jan 7 at the Craft Room at the Santa Monica Memorial Park, 1401 Olympic Blvd., Santa Monica.
The attendees, mostly retirees, presented their picks and their rationales. Most of their selections were biased towards steady income producers, towards avoiding major draw-downs and avoiding volatility.
Often the selections were presented in terms of the ticker symbol, which you can look up, for example, at finance.Yahoo.com. Type in the ticker symbol, say for an ETF, or a mutual fund, and check the left-hand rail column on the screen that comes up for a wealth of information, including: quotes, summary, charts, news and information, ETF/fund and analyst.
Alternatively type in the ticker symbol for a corporation. For a company, you can research under the headings of: quotes, summary, charts, news and information, company, analysts coverage, ownership and financials. A wealth of research information is at your fingertips via your computer terminal.
Some of the picks included:
FNMIX, Fidelity New Markets Income Fund, an emerging market bond fund, started in 1993. Since then it has had 15 up years and three down years. Its worst performing year, 2008 it was -18.24 percent, followed by its best year, 2009 at +44.56 percent. The fund has $4.23 billion in assets, with a year-to-date return of 7.95 percent, and a yield of 5.7 percent. Its return performance has been: 1 year, 7.95 percent; 3 years, 20.7 percent; 5 years, 8.38 percent; and 10 years 11.94 percent.
Examination of FNMIX’s chart shows a very large price drop off in late 2008, followed within a year by a complete recovery to a slightly higher and steeper price up slope than than the pre-decline slope.
Question, how can I decide to buy or sell it? If it is above the last convergence of the 50 and 200 day moving averages, that is a buy or hold signal. Look at finance.yahoo.com. and type in the ticker symbol. On the left side click on the basic tech analysis chart. When that comes up click on 50 and 200 DMA. You will see that the fund is in the buy or hold area.
To decide whether to sell it, look to see if the price is below the last convergence of the 75 and 300 DMA. You cannot get that information at Yahoo, so go to stockcharts.com., and type in the ticker symbol, and click on sharp chart. When the screen comes up, type in 75 and 300 in the moving average area, and then click on ‘update.’ When the moving average
Table of ContentsTop Money-Making Ideas…...Mutual Fund Group…...p.1
Challenging Year Ahead……..Dave Wright…………..p.4
Investing Hope and Fear…….Tom Petruno…...………p.8
Education Nuggets………..Don Gimpel……..………p.13
Stock in the News….…William Parmenter Ph.D……p.13
lines come up, you will see that they are roughly parallel and the fund is well above both of them. That shows the fund is in the hold range.
Why use a 50/200 DMA for a buy signal and a 75/300 DMA for a sell signal? The 50/200 is appropriate for an early buy signal, and was picked after testing various time periods. The 75/300 DMA is good for a sell signal, so as to avoid getting constantly bumped out in choppy markets. The time periods were selected after testing various numbers to see how they worked.
Using buy and sell signals, it would be difficult not to get a great and mostly stable income stream averaging 11.94 percent over the last ten years off FNMIX. Retirees have been rumored to kill to get that level of return in today’s low-interest-rate environment.
(Personal disclosure: I own FNMIX…don’t kill me if your purchase loses money. Do your own research and decision-making. Caveat Emptor. Latin, for don’t get ripped off.)
Since AAII is an educational organization, the example of FNMIX was worked through step-by-step, for research check points and for the buy and sell decisions. The FNMIX discussion is supposed to be a template for research and decision-making on the other recommendations. Each adult is 100 percent and solely responsible for their own research and buy and sell decisions.
Some other recommendations, without all the contextual information. You look up the ticker symbolsand take them through your own decision-making process.
XLE, an energy ETF.
LSBRX, a bond fund.
DBLTX, a reputed excellent bond fund, associated with Jeff Grunlach
Vanguard Hi-Yield Tax Exempt Bond fund.
Vanguard California Tax Free Bond Fund, returning around 7 % tax free.
Vanguard Long-Term California Bond.
RYLPX, Royce Low-Price Stock.
Rydex Leveraged Long-Term Bond Fund
PELBX, a $25,000 minimum investment emerging bond fund.
VIG, Vanguard Dividend Appreciation Fund—less return, but lower tax bite.
Following the roundtable of investment tips, Richard Young presented a handout and discussion, concerning using a basic tactical global asset rotation strategy, using ETFs.
The concept is to jump on the ETF to capture its momentum, and then, before it crashes, take your money and jump on the nextETF and capture its momentum. And, keep jumping. And, keep making money. By jumping as frequently as monthly (you might decide to hold), you capture momentum and
escape crash and burn.
He presented two model portfolios, each portfolio consisting of three ETFs.
One portfolio used the following ETFs:
Los Angeles County Meeting ScheduleWestside Computer Group – Don Gimpel, (310) 276-9875 . Veterans of Foreign Wars Memorial Bldg. Culver Blvd. and Overland Avenue, Culver City. The group will meet at 10:30 a.m., Saturday, April 7. Topic: TBA. The UltraFS 11 group will meet at 9 a.m. on the same day.
Pasadena Group– Will meet at 7 p.m. July 18, at Pasadena Main Library, in the David Wright Auditorium, at 285 E. Walnut St., Pasadena. (Meets third Tuesday of the month, except for August and December.) Topic TBA. Voluntary contribution of $2. Contact, Ivan Wong at (626) 446-2486, .
Mutual Fund Group – Meeting at 10:30 a.m., Date and place TBA For more information, contact Gunter Hagen (310) 457-7404. . Meetings are free to the public.
Stock Selection Group—Norm Langhout, (310) 391-6430, . Meeting at 7 p.m. , Feb. 22 using IBD, CANSLIM stock selection method , at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. The group meets the fourth Wednesday of the month.
Los Angeles Chapter--Will meet at 9.a.m. Feb. 18. Don Richner, CFP will talk on “Cyclical Bull? Or is the Secular Bear Resuming? He will be followed by John Buckingham, of Al Frank Asset Management, talking of The Value of Dividends, at the Skirball Center.
Desert (Palm Springs area) Group Usually meets from 10 a.m. to noon, second Saturday of the month at Sunset View Club House, Sun City, Palm Desert. In early February, 2012 Gamminowas working on putting together a seminar on dividend stocks. For more information, contact Patricia Gammino, . or at (760) 485-6161.
EFA (Europe, Far East Asia, and developed country stocks); SPY ( S&P 500 large cap U.S. stocks); and IEF (seven to 10-year treasury bonds). The portfolio had a 15.7 percentcompounded annual return, a .90 Sharpe ratio, a volatility percentage of 14.2 and a maximum drawdown of minus 15.8 percent—all between 2003 and 2011. Its worst year was 2005, when it lost minus 0.9; and its best year was 2009 when it was plus 34.6 percent The portfolio used SPY as its benchmark.
The second portfolio used the following ETFs: EEM (Emerging Markets Stocks); IJR, (S&P 600 Small Cap U.S. stocks); and SHY (one to three year Treasury bonds). The portfolio had a 23.2 percent compounded annual return, a .94 Sharpe ratio, a volatility percentage of 21, and a maximum drawdown of 22.6 percent—all between 2003 and 2011. Its worst year was 2008, when it was plus 1.9 percent, followed by its best year, 2009, when it was up a stunning 52.1 percent. The portfolio used VBINX as its benchmark.
Each portfolio consisted of three segments: U.S. stocks, overseas stocks, and bonds.
To implement the portfolios, each month see which of the three ETFs has the best three-month trailing performance, and put or keep your money in that one. Rotate or stay in the ETF that is doing the best, or the least worst.
The sweet spot is trailing three months performance for this momentum strategy. Young experimented with various trailing periods. Trailing performance captures momentum. Research shows that among multiple factors, momentum is the factor that captures the highest returns.
The buy and sell periodicity is monthly so as to avoid catastrophic losses that go with sudden downturns, and the bursting of bubbles.
To find out the trailing three-month returns, go toETFscreen.com. Type in the upper right corner the symbol (for example SPY). Hit enter and you will see a chart. Scroll down until you see a rectangular box that says compare funds. You will see SPY already in the box. Leave a space after each ETF symbol and type in each symbol that you want to compare: for example: SPY EFA IEF EEM IJR SHY. Then press ‘go’
Now you will see a listing of the six ETFs in a table so you can compare them over various trailing time periods. (The performance numbers include any dividends or distributions.)
For regularity do your comparisons at the end of the month and do your trades on the first of the month, buying the market price. The strategy, according to Young, works well only if you buy and sell once per month. Doing the strategy daily or weekly is overkill, and doing it less often than monthly sets up a potential for unacceptable losses.
(Another alternative, which Young spoke against is getting the three-month trailing performance numbers from Yahoo Finance. The problem with Yahoo is that they do erratic and inconsistent monthly updates—so it is not a good source.)
Young was asked to explain how he invested in the tumultuous year of 2008 using the first portfolio, consisting of IEF, EFA and SPY.
His answer was that from January through April he was invested in IEF, from May through June in EFA and from July through December in IEF. The portfolio returned plus 9.5 percent in 2008, compared to minus 36.8 for its benchmark the S&P 500—a spread of 46.3 percent, a sensational performance. This example brings out the point that you only invest in one ETF in the three-possibility portfolio at any given month.
(Disclosure: the author is using the system, and has a position in IJR; however, he has no financial or any other connections with Richard Young. Caveat Emptor.)
Since ETFs can be purchased when the order is received, you can sell, wait a few minutes, and using the same money buy the next choice.
Young used and suggested using ETFscreen.com, or ETFreplay.com to look up the three month trailing averages. He has no connection with either firm.
He also recommended various books that deal with relative strength, trend following, tactical rotation and tactical asset allocation. They are: Gerald Appel, Opportunity Investing (2007); Mebane Faber and Eric Richardson, The Ivy Portfolio (2009), especially, chapter seven on Winning by Not Losing. This book gives endowment fund studies results. The third recommendation was Michael J. Carr’s, Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing (2008).
Challenging Year Ahead: The Outlook for the Economy and the Financial Markets
By William Parmenter Ph.D., editor
Dave Wright and Tom Petruno talked about the economy and the market outlook for 2012 to a soldout out house at the Los Angeles Chapter’s Jan. 21, 2012 meeting at the Skirball Center.
They looked similar, both tall and wearing dark suits, but they made a complementary pair. Wright was stong on substance; Petruno was strong on style, and together they were a winsome team. Audience interest was high, as reflected in a lively question-and-answer period following their presentations.
Wright is a managing director of Sierra Investment Management, with over $620 million in client assets. He served for over 20 years on the AAII Los Angeles chapter’s board of directors.
(In this story, and the one that follows, considerable information and opinion has been added by the author, as his contribution to the topics. Most of the data have come from cited articles in the Los Angeles Timesor Reuters.Readers looking for exact transcripts of the the speakers’ remarks had the choice of attending the event, or in the case of Wright, examining his presenters slides on the website.)
One of Wright’s continuing concerns is the evolution of investment strategies. The old paradign was relative return, i.e. return compared to a market index, often the S&P 500. The relative return paradigm was associated with buy and hold, of three major asset classes (cash, mostly U.S. equities, and bonds).Relative return was supported by an impressive body of university researchinto Modern Portfolio Theory (MPT).
The tech wreck of 2000 and the debt bomb of 2008 were particularly brutal to buy and hold investors and to the financial industry’s misuse of MPT. With retirees getting their retirement savings scorched, and having their homes torched, investors, those who were still standing, began shifting to another paradigm.
The new paradigm emphasizes not losing money. It is that simple. It is called absolute return. Your benchmark is the value of your original investment, which is used to measure whether you gained or lost money. If you want a more sophisticated version of absolute return, use your purchase price, with a three percent inflation rate factored in, as your benchmark. The key question remains, did you make or lose money?
The compelling obviousness of the new paradign appeals especially to unsophisticated investors, whose minds have not yet been tainted by the brokerage industry’s use of MPT.
An example will illustrate the folly of relative return. You have an account with a prominent brokerage firm: your rep proudly announces that you lost 20 percent this year, but, not to worry, you did great, because your benchmark, usually the S&P 500, lost 30 percent.
You scratch your head, and comment that with a few more great years like that you will be broke, on the street destitute, and in the ranks of the Occupy Wall Streeters. The rep smiles disarmingly, and invites you to tax harvest your loses and to invest more—and, why not?, the house makes money on every transaction.
The investment industry is founded on the premise that the house always wins, because it relies on both fixed fees and mandatory percentages of OPM (other people’s money). Anindustry based onOPM, where the house gets a guaranteed profit, and where the customer takes the risk, can’t be that bad for the insiders. The nature of the brokerage business prompted the old saw: why are the brokers sailing yachts, while the clients are rowing dingies? (Just joking, but would the financial industry object if the government imposed a truth in labeling name change to: Wealth Transfer Industry?)
Before straying too far from the point, what was meant by the allegation of misuse of MPT? That refers to the misuse by brokerage houses of MPT’s efficient frontier curve. At one end of the efficient frontier curve a 100 percent bond portfolio had a 6 percent risk and a 9 percent return. Returns and risks varied according to the mix of stocks and bonds along the curve. At the far end of the curve a 100 percent stock portfolio had a 16 percent risk and a 14 percent return.
The Nobel laureate in economics who presented the efficient frontier curve was very clear that return could not be predicted, and it fluctuated greatly. To repeat for emphasis: return cannot be predicted and it fluctuates greatly. The brokerage industry “cynically relabeled the historical return axis on the chart, expected return,” according to Wright. Expected return, as in, expect a future annual return of 14 percent from stocks, and nine percent from bonds.
The brokerage industry sold the efficient frontier curve’s historical results, as expectation of future returns, to a generation of naïve buy-and-hold investorswho got scorched and torched in the tech wreck and the housing debt implosion. The fallout has been toxic for the financial industry, whose credibility has been vaporized.
The brokerage industry needs to ask itself why, at a time when the financial industry is pouring money into the market, retail investors remain skittish. Individual investors put $932 billion into checking and savings accounts in 2011 versus only $117 billion into mutual funds and ETFs, so reported the Los Angeles Times on Jan. 21, 2012. There is $8.6 billion in U.S. savings accounts and money market mutual funds (i.e. on the sidelines), reported the Dec. 2, 2011 L.A. Times.