Definition of Liquidity

I think that visceral reaction can be a valuable tool for fine tuning asset allocation, once you separate out one painful issue. One must abandon the "anchoring" tendancy, to wistfully cling to the way things were. Don't be like the house seller who even in better times sticks with an overvalued price out of sentiment and slowly bleeds for a year of lost opportunity.

Accept that a financial battle was lost, and today is the start of the next battle which you can expect to win (at least relative to your current realistic position). Tune your financial allocation so that the swings of fear and greed are about balanced as the rallies and dips proceed. Even the unfair dips, like my tiny allocation into equities recently were mauled by the political scares put into preferred and health stocks (I failed to learn from a similar Clinton experience).

Anyway I don't see why I've been criticized on this forum during early parts of this crash for advocating incremental sell downs. Shame on me for spending multiple (single digit) brokerage fees in the sell down and the future ramp up, some said. And would I please take this discussion of gingerly dipping into bonds off the forum, SHE said. Now I have preserved more liquid asset firepower, and do think and feel myself in a comfortable asset allocation.

Similarly in the early 2000's crash (under a different username) I was castigated on this forum for switching to fringe asset classes that were actually working, like certain long-short funds or certain financial sectors. And pre-internet, folks thought me nuts for immediately pouring money into stocks in the crash of 87.

I may be an idiot in 97% of aspects of financial planning (and truely appreciate the generous advice and brainstorming provided here), but I can't accept the party line on asset allocation and have thrived by defying it. The Vanguard/Bogle platitudes on slow and steady course with a backing of umpteen statistics seemed so plausible, but then seemed obviously in denial of the emotional rollercoaster of reality.

It was clear to me that if you felt the energy of volatility, you could harness it rather than just withstand it. No, this is not stepping into any frantic trading mode but simply reacting to the tides of history with strategic shifts. It does help to watch how various sectors of assets are doing and why at least weekly ("The Economist" magazine has been my bible on macro-currents of finance and world events for decades).

And charting trends are very valuable - I think the last 25 years are quite instructive, as in a slightly cartoonish version:

^IXIC&l=off&z=l&q=l&c=^n225%2C^mid&c=^DJIUnfortunately it doesn't reflect dividends, but suggests about theonly sector you might have wished to buy and hold were midcaps. Myformative stage was in the mid 80's where I held the Nikkei225 duringthat fabulous upslope. Note 1987 crash which was proportionately farless in Japan, so I judged it not the end of the world but a bigbuying opportunity which was quite right. And mainly by luck I bailed out of Japan before the mother of all horrifying and everlasting crashes happened. This prepared me for handling the tech and later financial crashes. The tech crash was not that scary because there damage wasn't so total... there were seeds of survival in corners of the equity market. The financial crash seems more scary with respect to stockHOLDers because the destruction is so widespread.

So I say listen and respond to what your emotions tell you, as long as they are informed and not just knee jerk. Something seems missing from the financial planning cold logic that I have been exposed to; I don't think conservative holdings with overanalyzed p/e ratios are the answer. In my personal experience I managed my retirement account in a more traditional conservative way and it fell behind. Also I was appointed trustee of some relatives estates, and also saw how backward looking conservatism had driven hard won assets into decline. "Watch/ think AND feel/react" is my investing motto.

With due respect for the OP's humor, but not necessarily chuckles over the declines ...

Would you say a bit more about what you recommend? Ideally with some analysis showing why? I gather that principally you are saying stocks will not bring about a positive return over the next decade, so one should move to cash and prepare to trade. Are you saying "buy and hold is dead"?

I'm not criticizing you. I don't believe I have previously. Generally, one can expect that when one is right, but not in agreement with the majority, one may be hacked to death. It's an interesting phenomenon.

"dapperdobbs" wrote

I'm not the OP but I think stocks may take a decade to get to their old highs. Obviously, that's just a guess.

The best performing ETF's for some time now have been the 2X and 3X short funds. I know these aren't for everyone but they have been working. Myself, mostly in cash and bonds (GNMA), but I have some play money.

Example, if you bought 2,000 shares of RFN on Jan 9 at 36.75 ($73,500 + $7) it would be worth $165,980 now. A profit of $92,480. A gain of 125.82%. I still have some RSW but I'm feeling now may be the time to sell that too. I fear a bear market rally is near and these can be impressive.

Of course, liquidity is being able to convert one's assets to cash.

Cash has the greatest liquidity followed by checking accounts, stocks, and real estate.

Tradable securities have lower liquidity when they have a low trading volume and an accompanying bid ask spread.

-- Ron

? To what kind of bonds were you referring in this past discussion? Please cite the thread, because many of the regulars, myself included, and professionals elsewhere think allocating more and more to investment grade bonds as one ages is an appropriate strategy.

I got a kick out of Joetaxpayer's elderly client raving about what a great financial advisor for advising her to do what is, IMO, good ol' conventional wisdom: If you're in your 80s, better have a huge chunk in CDs, high grade investment bonds, etc.

Just to repeat what I think should be a mantra here.

My latest blood sport is skewering leveraged ETFs of all types and this is a perfect opportunity. Setting aside the issue of whether one should speculate about the short-term pricing of stocks using leverage, these ETFs have another problem: they don't do what most people seem to think they do.

RFN is an inverse 2X sector fund pegged to the stocks in the S&P Financial Sector index. If those stocks drop (-5%), "inverse 2X" would be +10%. Too many people assume that works over periods like a couple weeks or months or even longer. But as it states in the prospectus, that isn't the goal at all - the goal is 2X the DAILY returns of those stocks.

This is an enormous difference and the dates you listed give a perfect example...January 9 to "right now":

S&P Financial Sector ETF (ticker XLF) "long" ETF tracking this index

1/9: $11.56 close 3/12: $7.79 (intraday, delayed quote) change: -32.6%

-2X change: +65.2%

Rydex Inverse 2X S&P Select Sector Financial ETF (ticker RFN)

2X inverse ETF tracking this index 1/9: $37.53 3/12: $46.31 (intraday, delayed quote) change: +23.4%

So far 100% of people I've discussed leveraged ETFs with would expect the returns of the ETF to be somewhere around 65%. But it's never that way, if only because of [google:] variance drain, which bleeds money out of a leveraged investment. 2X risk, without 2X returns. On top of that are all sorts of slop from the ETF creation/redemption process, trading spreads, and the way the money is actually invested. On one hand, people could scream bloody murder about these mismatches, but on the other hand, it's right there at the front of the ETF prospectus, fully disclosed in black & white under "risk factors". But who reads prospectuses?

That issue aside, the volatility of these 2X sector funds is astounding

- nearly a 50% drop in just the past 4-5 trading days for the financials. Easy come, easy go.

Don't get me started about UCO/USO - the regulators seem to be on that one, finally.

-Tad

The RFN hasn't been around a year yet, so I could only graph vs XLF for

6 months max. XLF down just over 50%, RFN also down, about 45% or so. So, it would appear to be even worse than you suggest, wow.

Can anyone explain what happened in Dec/08 when RFN dropped suddenly with no equivalent movement in XLV? I see a similar drop a few days later in SH vs. the S&P and in both cases it kind of accounts for the difference between the actual and the expected returns.

TIA

A cash dividend of 50% of the ETF's value, so I need to update my blog post, and the above remark would be adjusted to "RFN at a bit better than break even. Right? With XLF down 50%, you still expect a huge positive return on a double inverse ETF, not just a 10% increase....

Well, great minds often post here and days or weeks later, Forbes covers the same story. In this case, Tad's (great mind) and Forbes' article regarding ETF tracking error. An excerpt:

"For example, anyone buying and holding ProShares Ultrashort Financials would have gained 4.3% in 2008, versus a decline of 50% for the Dow Jones U.S. Financials Index. Since the fund seeks to double the opposite of the Dow Jones Financials Index, many buy and hold investors presumed they would instead have gained 100%. Sorry, Charlie, the devil is in the details."

The full article at

Joe