Portfolio Risk Mitigation Summary Hi Guys,
I was anticipating some heat from Forum participants challenging me for being far too presumptive and arrogant with regard to my personal risk control mechanisms during a market meltdown. My signals feature technically-oriented parameters.
So I braced for charges that never materialized. I steeled myself by recalling an old adage often cited by US airmen during World War II: “If you are not taking flak, you are not on target.” But the flak was totally missing. Perhaps I was off target.
I want to thank those Forum members who did respond in a reasoned, an informative and a kind way. I really do appreciate your contributions to the discussion. That type of interaction stimulates learning, and learning helps sharpen market understanding and decision making. That was my sole purpose. I was aspiring for far more diverse and energetic responses, accompanied with high emotions and sharp edges. In that respect, I fell short of my expectations.
While reading and reflecting on the few replies, I am reminded of a notable quote offered by Warren Buffett at one of his recent Berkshire Hathaway stockholder annual sessions. The quote went something like this: “There is so much that’s false and nutty in modern investing practice and modern investment banking. If you just reduce the nonsense, that’s a goal you should reasonably hope for.”
I suspect that much of what is “false and nutty” is related to overly complex modeling and imprudently assembled financial products. These models and products have generated false myths and uninspired (sometimes downright disastrous) portfolio performance.
Remember the heavily promoted Nifty-Fifty growth stocks in the late 1950s and their ultimate collapse in the 1960s. I fell victim to that irrational exuberance.
And remember academia-driven Portfolio Insurance in the 1980s that failed so miserably to protect portfolios in the October 1987 sudden equity crash. I escaped that trap.
Recall the Real Estate bubble in the late 80s with its heavy-handed S&L involvement and its subsequent dramatic unwinding in the early 1990s. I had enough reserves and geographic diversity to outlast that systemic failure.
The Long-Term Capital Management (LTCM) debacle in 1998 is yet another illustration of an academically encouraged strategy that resulted in the demise of that organization because of excessive leverage, and a failure to regression-to-the-mean modeling in a timely manner. I never even knew this problem existed before its final resolution.
Of course, we are still trying to recover from the current housing crisis that in part was encouraged by faulty Collateralized Debt Obligation (CDO) designs and sold by profit hungry institutional banking agencies. The holdings were not independent of each other as assumed, and the statistics were not normally (Bell curve) distributed as postulated. I avoided the specific CDO snake pit, but, of course, its synergistic impact of the overall economy persists.
Learning by doing is always the best classroom, especially when investing. As Jesse Livermore said about a century ago, “The game taught me the game. And it didn’t spare me the rod while teaching.”
Also, Jesse observed that “The game does not change and neither does human nature.” And finally, from Livermore, who experienced both the rewards of prescience market calls, and the destitute of bankruptcy from failed calls: “The speculator’s deadly enemies are: ignorance, greed, fear and hope.” The marketplace is a hard teacher.
By the way, it is a pity that Jesse Livermore committed suicide. He died a poor, lonely, broken man.
I believe that some of the industry’s and academia’s sophisticated models do offer some detailed structural insights, but they also often fail to capture the market’s major trends. At times, modeling simplifications can uncover that fundamental trending more successfully than more complex models. Also, these more simple formulations are accessible and deployable by private investors, thus permitting them to make their own judgments and decisions.
Several well recognized aphorisms nicely summarize my overarching viewpoints on this matter.
“Common sense is not all that common.” Continuous learning is a necessary ingredient to enlarge an investor’s financial and investment acumen and databases. It’s the price we pay for participation in the marketplace if we harbor any prospects for success in that enterprise.
“If it gets measured, it gets done.” Private investors must gain familiarity with a few market yardsticks if they expect to capture average or above average returns. Otherwise, they are an unexpected volunteer victim to the professional market hucksters and their media enablers who shamelessly tout them and their products. We can do better then that with just a little awareness and effort.
“None of us are as smart as all of us.” So let’s keep the communication links, open, on a friendly basis, and at a high, principled level. Your contributions will not only be helpful to others, but will focus and crystallize your own thinking on any investment issue that you address. Constructive group leadership is superior to individual leadership on any topic.
An early recognition and reaction to global market trends is an indispensable tool that serves to protect and preserve our retirement portfolios. Enough said; just apply history’s sometimes ignored lessons learned. Stay alert everyone.
Best Regards.
Cost Basis 2011 and beyond I think a lot of the confusion about cost basis is because there are two different, but interrelated things going on. One is which shares are being sold, and the other is how much each of those shares cost.
Now (and also with the new rules), unless someone says differently, the oldest shares are sold first. That's the default.
With average cost, the cost of all the shares (including those old shares that are getting sold) are the same - the average (duh). When you use average cost, the only effect of the FIFO (sell oldest first) rule is that the gain or loss is long term (because you're keeping your youngest, short term shares, and selling your oldest, long term shares).
If you're not averaging the cost of the shares, then the cost of each share is the actual cost you paid (including load, if any, commission, etc.) I find this conceptually simpler, but can require more record keeping (since you have to keep track of how much you paid for each share).
Under the current (not new) rules, you have only the following options:
1. Use average cost to compute the (equal) cost of each share sold. No choice in which shares are sold - it's oldest first.
2. Use actual cost of each share sold
a) Don't tell your fund/broker anything - then you're automatically selling your oldest ones first (FIFO)
b) Tell your fund/broker exactly which shares you're selling (when you sell them!); then you're selling those particular shares, and their costs again are what you paid for each of those particular shares. This is called Specific Shares.
I'm giving the old rules because the calculations are the same for average cost either way (I have an example below), and I don't want to clutter this post too much with new rule complexities. Next 2 paragraphs are FYI how the new rules complicate things.
[ Under the current rules, the default is FIFO (2a). See end of note for comment on this, since you are currently able to change this to average cost when filing. That won't be true in the future. Under the new rules, your broker specifies the default (and most will use average cost (1)). And you won't be able to override this once the trade settles. But you will be able to tell the broker explicitly to use a different default method (within reason - it has to be one of the ones the broker is set up to handle).
Under the old rules, once you selected average cost (#1) you couldn't switch to actual cost (#2). Under the new rules, you can. I'm not going to try to answer question #2 if you want to switch back from average cost; I'll assume that you're sticking with average cost. ]
All said,
Answer 1: selling oldest first simplifies matters - you don't have to say anything to the IRS or your broker, this will happen automatically. If you're averaging cost, then this just helps ensure that the gains are long term gains (see above).
Answer 2 (assuming you stick with average cost) - you just need to keep a running total of the number of shares bought and the average cost. For example:
1. Buy 100 shares @ $10: average cost is $10
(total cost = $1000, divide by 100 shares)
2. Sell 20 shares: average cost of shares sold = $10 (from #1)
average cost of remaining shares = $10 (from #1)
number of remaining shares = 80
3. Buy 40 shares @ $20:
total number of shares = 80 + 40 = 120
total cost of shares = 80 * $10 + 40 * $20 = $1600
average cost of shares = $1600 / 120 = $13.33
4. Sell 100 shares: average cost of shares sold = $13.33 (total cost = $1333.33)
average cost of remaining shares = $13.33
number of remaining shares = 20
Notice that you never have to go back more than one step - you just keep track of your current average cost and the number of shares you still own.
Had you used actual cost, then the cost of the 20 shares you sold would still have been $10, but you'd have more bookkeeping for the remaining shares:
1) 100 shares bought at $10
2) Sell 20 shares
a) 20 shares sold with a cost of $10
b) 80 shares remaining with cost of $10/share
3) 40 shares bought at $20
You now have 80 shares at a cost of $10 (2b) and 40 shares at a cost of $20 (3)
4) Sell 100 shares
a) 80 shares with a cost of $10 (2b)
b) 20 shares with a cost of $20 (3)
c) 20 shares remaining with a cost of $20/share (leftover from 3)
Notice that you had to keep track of multiple lots of shares, so long as you had any shares remaining from each purchase.
In the future (2012+), the method used for computing your cost (and which shares were sold) will be determined by the time the trade settles. You will either explicitly tell the broker what method you're using, or you'll be stuck with whatever the broker has on record as the default method. That's a big change.
Currently, the default rule (despite what the industry would have you believe) is FIFO; but you're allowed to change that to average cost when you file (obviously much later than the settlement date).
From IRS publication 564: "You chose to use the average basis of mutual fund shares by clearly showing on your income tax return ... that you used an average basis in reporting gain or loss".
Even now, if you don't mark this on your tax return (and you didn't tell the broker which shares to sell), you're technically using FIFO (regardless of what the broker tells you it thinks your cost was). I will bet that nearly all filers get this wrong - they omit marking up their tax return. (I haven't figured out how to get TurboTax to put this on a tax form - I write it in by hand.)
Janus Protected Series-Growth JPGDX- 20% downside protection. Janus launced new fund which uses insurance product to guarantee 80% of peak NAV.
Current ER is 1.64%.
JPGDX
Capital Protection Fee at a maximum annual rate of 0.75%. Because the Capital Protection Fee is based on the aggregate protected assets of the Fund rather than on the Fund's total net assets, it can fluctuate between 0.60% and 0.75%, thereby resulting in the expense limit fluctuating between 1.38% and 1.53%.
Annuity type products are usually a bad deal for investors, so it the same true for this fund?
![[Deleted User]](https://mutualfundobserver.com/discuss/uploads/null)
