April 5,2012

My financial journey remains a work in progress. And, every so often,  I believe I need to step back and cast a revisionist eye on what I’m doing.

Until now, I have followed the rule of thumb taught me as a young officer at Citibank.  Risk no more than 5% of your capital  in any one name.  I have followed this rule, whether lending or investing,  my entire business life.  That is why,  at this moment, I have 4 reserve positions of $ 40,000 each ( earning nothing ) instead of building out my existing positions..   No existing  position exceeds 5%.of my total investment capital.

But wait !  On reflection, I believe I have been totally ignoring the idea that the ETF (  SPY )  is really  500 stocks in one basket. How much more diversification do you need than investing in  500 of the largest USA corporations? !!   And what a bargain it is at $7.00 commission per trade!  If  I bought each of the 500 stocks to fill my own personal  basket, the brokerage commission would amount to $7.00 x 500 trades  = $3,500. instead of $7.00.  I consider that a very big break for the private investor.

Until recently, much higher brokerage fees encouraged a buy and hold strategy.  This was reinforced by successful people such as John Bogle, the founder of Vanguard who claims that a buy and hold strategy on the S&P 500 Index  (SPY ) would outperform the majority of  portfolio managers over time.

If you look back 10 years that claim may be true relative to portfolio managers.  But, a passive buy and hold strategy took your capital  on a complete round trip all the way back to your starting point  10 years ago. That’s definitely not for me.!

So, what to do. ?

A ) I can either invest time and effort to surround SPY with other ETFs which represent Sectors, Countries, Commodities, Precious Metals, Currencies etc. such as I am doing now.  The goal is  to enhance the roughly 11% SPY has gained over the past three months. But, that takes a great deal of effort and time for maybe only  marginal success .  Or, 

B )  I can spend time sifting through charts and technical data to become  a better SPY market timer. And additionally. subscribe to a timing service such as The Chartist ,  as I have. Or, 

C  ) I can  invest only  in SPY  on a ” buy and hold ” basis  and  know I own the USA stock market for better or worse and concentrate on swimming and golf .  Here time ( if you have enough ) will ride to your rescue even if  you entered SPY at a less than optimum price. Or,

D  ) I  can invest some  of my money in SPY ( on a buy and hold basis )  and market time the  rest in SPY  by following a rigorous  mechanical strategy to catch intermediate trends.  In no way am I interested in day trades.

I think I like ( D ) Buy and Hold , say 20% ,  Time 80% and add a little rocket  fuel from IWF ( Russell Growth 1000 ) and QLD ( QQQ x 2 ) . The timing portion would be 70% SPY, 15% IWF, and 15% QLD.  The timing driver would be the SPY chart.  Only 3 symbols instead of 25 to simplify and save commission ( $7  x 25 positions = $175 = $350 for a round trip ) ( $7 x 3 positions =$21= $42 for a round trip.

As for the immediate future, I’ll  just  ” go away ” ( sell my aggressive positions  )  April 30,  unless there are compelling reasons to stay invested.  But, I’ll  be gone before April 30,  if SPY violates  $ 127.75 ( with conviction ).  I’ll be watching all the action and volume around the 50day, 100 day and 200 day moving averages for SPY.

When I do leave this market, I’ll be investing in 8 to 10 income focused  ETFs to get a better than a mini money market return 

Today , as I  write this, the markets are dancing to Europe’s mournful  tune .  But,  this I know  for sure.   The USA is regarded around the world as the best place to invest. And, with interest rates as low as they are, the main USA risk is to be out of the market because the market has no competition,  So, I am ” all in ” except for the 4 reserve positions.

Richard Maurice Gore

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