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Portfolio > Mutual Funds

Surviving Shaky Markets

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Here’s the thing. The market has become a squirrel, running up and down the neighborhood trees without rhyme or reason.   The neighborhood is the world, in the case of investments, and the squirrel’s tracks are what you see on the chart at the end of each up-and-down day. 

The problem may be high-frequency trading — the huge second-by-second trades geared to make a few pennies here and there. It’s not so much that one trader is making huge trades, is it? No, it’s more that many traders are trying to second guess one another. (Oh! Will all the other traders worry about the current Greek tragedy? Should I move now to beat the stampede, before all the others get the same news?) As you probably guessed, every trader thinks the same thing and trades the same way, and the market moves like mad.  

This could be a big part of market volatility. In the old days, traders would get the idea of Greece (or Spain, Portugal, Ireland or whatever country) being in trouble and then, after a week of angst, move on, knowing that a troubled country (or issue) would either get sorted out or not and planning for contingencies either way. The market had a kind of order amidst chaos. Not now! A country in trouble has to have new issues every day, reported by the media every moment, so that the news continues forever. It’s as if a country in trouble becomes a celebrity, requiring constant attention and fuss. Once politicians become used to the media frenzy, there’s no stopping any of it. So, the Greek tragedy repeats and repeats and repeats.  

Given the fact that newspapers are in deep trouble and TV news viewing is down, it’s amazing how much trouble the media still causes. Maybe it’s the Internet media. We are all becoming used to instant news — I’m not sure we read deeply, but we read quickly, and with backlighting.  

I recently received a new blurb from American Funds, and its parent has capitulated and now has flexible funds. They look interesting, as does Invesco Balanced-Risk Allocation and others. The funds attempt to soften volatility by providing a tactical overlay, often based on risk assessment. 

A recent brochure, mostly concerned with traditional funds, indicates that $100,000, if invested on Dec. 31, 1991, would have become, if invested in the S&P 500, $449,667 in 20 years (at the end of 2011). That’s a return (annoyingly, I had to calculate it, since the fund company didn’t) of about 7.95%, annualized. So, where else could you earn 7.95% yearly? But you would have had to ignore the volatility, right? Otherwise, one would have earned probably 2% or 3% annually by selling low and buying high because of nervousness during volatility. Or you could go the CD route, now even more terrifying — it’s not for nothing that they are called Certificates of Disappointment.   

Since many customers cannot stand volatility, it’s the reason I often discuss third-party (SMA) managers — companies like Portfolio Strategies Inc., BTS, W.E. Donoghue, Weatherstone and Curian Capital. The other thing I visit about is The Sherman Sheet, the collection of tactical plays authored daily by Bill Sherman. All of these plays, including some flexible funds, allow you to focus on gathering assets while the fund/SMA/tactician does its best to protect against the bugaboo, The Great Volatility.   Our customers do not like The Great Volatility!   

Here’s how to contact those companies:

The Sherman Sheet, (888) 957-3438

Portfolio Strategies Inc., (940) 497-0689

Weatherstone, (800) 690-5918

American Funds Distributors, (866) 421-2164

Invesco, (713) 214-7630

Curian Capital, (877) 847-4192

W.E. Donoghue, (401) 954-7200

BTS, (800) 343-3040

Have a non-volatile week. (Fireworks are okay.)

For more from Richard Hoe, see:

We’re Number One

Fragile China

Economics Rule


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