Gold Overweight

Jun 17, 2011 in Ideas

Our commentary has focused on bonds for many weeks now.   Within this defensive portfolio level view ---  being overweight Gold makes sense to us.

 

 

 

We think a gold position can enhance return here --- with the added benefit that such a position will likely continue to reduce a bond portfolios variance.

 

 

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Comments (13) -

Jun 20, 2011 05:36 #

That's funny, I was just looking at how gold is doing and had just tested a portfolio identical to this one but with BNO added in also. It is hard to ignore oil in this day and age.

dwoodriff United States

Jun 30, 2011 13:42 #

You'd think the market might have tipped its hand - I've been long IEF and GLD since the middle of this month - but I'm down 3%.  They both went down together, perfectly correlated...jeesh!

noebro United States

Jun 30, 2011 14:54 #

Both corporate & treasury bonds ended fractionally lower for the month and both beat S&P 500 for the month, despite the late vertical rally in stocks.   In long-term absolute return context, this was a pretty meaningless month.    Good month to just stay out of trouble ---  my impression is that many stock-pickers and hedge funds had rough quarter.    

Chris United States

Jun 30, 2011 20:16 #

My 1/2 year has been lame.  Was all over the "right" trades but got stopped out or bailed for one reason or another.  Thats why I love the mechanical nature of some of the best ETF models on the replay.  No emotions.

All my models are still calling for SHY (cash) or WIP/BND going forward for July.  Anyone else getting the same reads.  I have a MA filter set in the 7 month range on one very successful model (140 day).  Who's model can get the highest absolute returns from 1/1/2006.  I have one that is almost 300%!  This one rode Silver up earlier in the year and I stopped out of SIVR way before the model did.

widespread panic United States

Jul 01, 2011 12:24 #

My monthly model is long the bonds again, intermediates.  My sector model is long XLV (go long the highest relative strength sector when SPY is trading better than its 10 MMA), my semi-monthly has me back in XLU.  Totally missed the vertical pop...

noebro United States

Jul 01, 2011 13:17 #

I mentioned in a blog video not long ago a trading range might develop.   This seems to be what we are in --- a volatile one.    When you see that happening, the safest thing to do is first get your portfolio volatility down.    The markets got slammed in June and side-stepping that makes it easier to start putting on more volatile positions as we go forward.

There are trillions in investment dollars out there and it has to go somewhere as cash is not an option.  Having models to help guide you to where that money is going is hugely helpful.    

Chris United States

Jul 02, 2011 15:16 #

It was interesting to read of different approaches in addition to buy topX   --  like stopped out. What’s a good way to use stops with relative strength ranking?  
Set a stop loss at e.g. a fixed 10%? or at 30% of volatility?  
How to reinvest after being stopped out? reinvest immediately in topX or wait for the update day? With the recent quick rotation of the top ranked – it appears to me that it was better to wait.    

Alternatively one could sell an ETF when it is worse than the top (X times 2) --  e.g. for buy top 2 strategy : sell ETF when worse than the top 4.  

Anybody has experience with these approaches ?

hugos Germany

Jul 04, 2011 17:06 #

hugos has a good point...am I whistling past the graveyard expecting relative strength to take care of itself, i.e. if my backtest tells me I may experience an 8% drawdown and I can live with that, am I foolish not to protect myself on a daily basis from the bottom falling out?  Chris, you may have PM experience, what say you on this topic?

noebro United States

Jul 04, 2011 19:40 #


If you upgrade your positions to the higher relative strength ETFs -- then you may call that 'stopping-out' of the last positions.     The difference is that it is based on time-intervals rather than price stop-outs.

We have tested some price-based stop methods and they invariably lead to lower long-term returns.   We have found its best to install 2 disciplines:

1) upgrade the portfolio with the top-ranked ETFs on a time-schedule  (ie, monthly)
2) run multiple strategies at once --- including at least 1 conservative strategy where nothing in that particular list is too volatile.  The Advanced Relative Strength Backtest application is perfect for this.  

At the end of the day, make sure that whatever you do --- you are at least aware of its level of risk.    As we've stated in the past, these relative strength strategies can perform very well and yet still lose money 1 out of every 3 months.   But its up to you on how you control your drawdowns.   If you have 3 strategies that all say to buy Silver, Russia & Gold-mining equities --- then obviously this is basically no different than being heavily leveraged.   Why?  Because these are all extremely volatile segments of the market.     After you've tested some portfolios -- use a 'sanity check' --- do the prospective picks -- when blended together into a portfolio --  have 25% volatility over the past month?   That would be quite high --- you certainly shouldn't be surprised if that portfolio gains/loses 7% next month.    If you want to dilute that volatility and still go with those picks --- that is easy enough, own a decent percentage of short-term bonds.   This way, you can do the right thing in terms of not getting caught in a price-based stop-out --- and yet you can still sleep at night.

We have made this point a number of times:   if you constantly run your portfolio at high levels of volatility, its really just a matter of time before you have a large drawdown --- just because a relative strength strategy hasn't yet had a XX% drawdown doesn't mean it can't.    In the end, you have to watch your back  --   it is ok to err on the side of safety.    In fact, for professional investment advisors, there is a general rule actually called 'safety first' ---  above all first focus on a solid return.    Once you have protected the portfolio with some level of safety -- then you can pursue the higher-returning investments that drive outperformance.     This is really what the Core-Satellite framework is all about.

Chris United States

Jul 07, 2011 18:12 #

Well put, Chris, thanks for the portfolio management crash course.  You can tame your higher beta assets with cash, or like you said, with short term bonds, but at what point is it safe to put more risk on?  Can you suggest a way to market time with screener or with the other tools where an advance signal might be given to increase exposure to higher beta assets?  Or vice versa, to take risk off the table?  Of course, this is the holy grail of investing, but I get the feeling that you're onto something on this site, and that the tools you provide really make a difference in terms of profits.  BTW, love that Advanced Relative Strength module!

noebro United States

Jul 08, 2011 06:41 #

Chris, thanks again for these more general comments - very valuable.

I have found a conservative strategy with a low volatility portfolio that includes a moving average (which is similar to the approach that worked well for me in real time in the last 2 bear markets).
Also I have found a more aggressive top-ranked strategy. Unfortunately I cannot backtest the aggressive/conservative combination in the Advanced Relative Strength Backtest application. Please include there the MA filter also.    

hugos Germany

Jul 18, 2011 01:34 #

Chris,  many thanks for having added the MA Filter option to the Advanced Relative Strength backtest

hugos Germany

Jul 19, 2011 08:49 #

Thanks for patience hugos.   This has become an extremely robust application.

Chris United States

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