Hello,
With the uncertainty that abounds us today and with its potential to have negative effects on the markets I have ended a seasonal overweight strategy that over weights equities during the fall and winter months as I have now reset my weighting factor from up to a +5% overweight to neutral. I will watch the markets for another week or so before possibly moving my seasonal underweight factor from a neutral weighting to a -5% for the off season weighting (spring through summer). For sure, come May I will adjust by the calendar if not before.
In addition, I sold off some equities earlier in the week which has now taken equities from about 55.3% weighting in my master portfolio to about a 54.0% weighting. As you may recall my risk tolerance range for equities is a low of 40% to a high of 60% as was determined by my broker through a risk tolerance evaluation that was recently performed. With this, I am still above the neutral position of 50% but moving in the neutral direction as I adjusted equities downward, sold some off and raised cash, because of a seasonal overweight strategy coming to a close.
In review of Morningstar’s Market Valuation Graph the rolling ten day undervaluation average, by my math, is four percent. If you take the 50% neutral allocation and add the undervaluation average of 4% to the neutral allocation of 50% equities, you arrive at an adjusted equity allocation of 54% which takes into account the markets current undervaluation, at this time, as determined by Moringstar.
If one wanted to go light on equities based upon an underweight due to the seasonal strategy coming to an end then this is where you would use the underweight seasonal factor of 95% which reflects the historical off season adjustment for equities I use. To adjust the current 54% allocation to the off seasonal weighting then multiply 54% times .95 and this equals about 51% which now adjusts for the seasonal under weighting. Note this adjusted allocation does allow for an undervalued market as determined by my reference to Morningstar’s Market Valuation Graph which I have linked below.
http://www.morningstar.com/market-valuation/market-fair-value-graph.aspxAs I have said many times before … What I do, might not be right for you. I make these post for informational purposes only as at times through the years I have had many work associates, friends, relatives and others ask me for my thoughts on the markets and what adjustment I might making within my own portfolio. So they can stay informed, I now direct them to this board rather than sending out a personal newsletter form time-to-time as I have done in the past.
Have a good rest of the week … and, Happy Easter. I am now taking Holiday till Tuesday.
Good Investing,
Skeeter
Comments
happy early Easter
Always a fan of your commentaries
what are your thoughts about the market going forward? Any chance we'll keep this gain until the end of the year? Will we be 20 or 30% + ytd at end of 2012?
thanks for any suggestions
Regards- OJ
My question is.... where do you put the money removed from equities? MM and cd rates so ridiculously low, and lots of warnings about end of 30-year bull bond market. Cathy
There are likely a number of lower-risk fixed income options that others will likely be able to offer if you didn't want to go to cash. I'm not in cash at all - I own what I want to own for the mid-to-long term (especially long-term for a series of various stocks) and am really trying to make very little in the way of moves for the next year or two.
Or one can always look at going to cash (MM/CD/etc) as at least not putting money at risk (aside from inflationary risk.)
My approach would make it very hard to do what you do. I have chosen funds who's managers adjust the percent equities in their funds. Funds like FPACX, ARIVX, YAFFX adjust equity distribution based on how 'they' read the market. I'm guessing you do not use funds where the manager makes these adjustments or managers who go heavily into cash based on their economic read (?).
Skeeter, what vehicles do you use to get these precise % weightings based on your valuation methods.
Hi Cathy,
Take a look at PRFSX, which would be my top choice for taxable cash.
Kevin
I like SIRIX, but it holds too high percentage of DBLTX, which I already own. I've been very happy with BERIX - and even not afraid of my YACKX, which has ups and downs within my comfort zone and has gained well over my goals.
My "closest to cash" fund is RPHYX - YTD and 12 month returns low, but so much better than cd's, and nice and steady.
I am concerned about my PRIIX, seems too longer-term to be in Treasuries now. What do you think about this?
http://www.bloomberg.com/news/2011-02-01/whitney-municipal-bond-apocalypse-is-short-on-default-specifics.html
Unfortunately many followed suit and lost out in one of the few bright spots in 2011 including muni funds. Going forward munis will likely to do okay as the economy slowly recovers. We like Vanguard's offering since the charges lowest expense ratio, 0.20%, versus 0.50% of the average muni funds. In the bond world that is a sizable advantage that is difficult to overcome. Also higher credit muni are commonly held in Vanguard funds.
If you are concerned about state-specific credit risk, you should considered national munis to spread the default risk. Last time I looked, California constituted about 22% of the national intermediate term muni bond.
If you are concerned with rising interest rate, you should stay away from long duration muni funds. Given the state of economy, it is unlikely the rate will rise substaintially in 2012 or even in 2013.
Q: Request for thoughts on the markets form John Newton. Hi John, I feel stocks will be going soft as corporate earnings reporting works its way through the upcoming earning season and stock valuations will remain soft on into and through the summer. After we get through the November elections I feel the S&P 500 Index will close around a forward P/E Ratio of 14. With forward 2012 earnings estimates being in the $105.00 range this would put the S&P 500 Index some where around 1470 at years end. During the summer I believe it is possible that we could see a retreat back to a P/E Ratio in the 12 range and with this that would put the S&P Index around the 1250 range. That would be a high to low range with a spread of about 17% or so. There are many global happenings and events that could have a big bearing on this out look … but, you now have my current “SWAG.” It is for certain that no body knows what will transpire until after the fact. In addition, I feel bond valuations will go soft as interest rates rise in the coming months so this is something on the radar screen that needs to be given some thought as well … not just equities.
Q: Where do you put your cash form the sale of equities? Hi Cathy G, thank you for the question. Currently, most of my cash is liquid with the exception being what remains of a CD ladder that still has a couple CD positions that are paying in the 5% interest range. They will be maturing in the near term so with this all my cash will be liquid with no time deposits. It does not take much for one to figure out where I am with my cash allocation if equities and other assets are now at 54% and income is at 25% … then this leaves cash at 21%. The way I have been making my cash productive is to use it to fund special short term investment positions and other investment strategies. Some might recall I was a buyer of equities back during the summer going into early fall. When the market turned upwards this resulted in capital appreciation on these special positions and my equity allocation grew to about 63% to 64% of the portfolio. I then began to scale equities back and this resulted in booking capital gains form the sale of the special short term investments. This is one way I used some of my cash to make it productive. I’ll admit with cash having little or no yield it is not much of a productive asset class unless you can do something with it as I have. However, when equity and bond valuations start pulling back in their value, cash will remain a stable force and help stabilize the portfolio in the upcoming anticipated downdraft. A high cash position should help soften the down turn form my thoughts. Plus it will provide me a means to taken advantage of a stock market pull back when and if it takes place allowing me to reload my portfolio with some special short term investment positions. So, carrying this amount of cash does not bother me at this time.
Q: What vehicles do you use to get precise percentages? Hi MikeM, thank you for the question. The percentages I referenced were for the Master portfolio. The Master portfolio consists of the sum of several portfolios … taxable account, 401K and IRA. In adding the valuation of equities from all the portfolios together resulted in a percentage that I expressed out to the tenth … I believe it was 55.3%. I usually reference only whole numbers by rounding. Sorry if this misled you into thinking otherwise.
I hope this response answers your questions as I tried to cover everything that was asked. If I missed something … please let me know.
Have a great week … and, Good Investing,
Skeeter
An update … Since the S&P 500 Index has pulled back a little better than four percent off its recent high which was in the low 1420’s range to the low 1360’s … I elected to reduce my equity exposure downward to about 50% of the portfolio. This now puts me at about 25% cash, 25% income and 50% equity. In equities, I am overweight the defensive sectors of utilities, health care and consumer staples. All of three of these sectors kick off some good dividend yield so, with this, I now plan to sit tight … for a while anyway.
Have a good evening … and, Good Investing,
Skeeter