“Do Half” Applied To Equities

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“Do Half” Applied To Equities

Four major stock indexes, the DJIA, S&P 500, Nasdaq, Russell 2000 all closes at records on the same day.  From that same article, Ryan Detrick, senior market strategist for LPL Financial said that it was the first time all of those indexes set records on the same day since December 31, 1999.

 

For those that missed the rally, do you feel bad about it?  Regretful?  Really, it’s too bad that the bear bug got you to the degree that you acted on it.  Those who have read me for a long time know that I often sound bearish, because I am natively bearish.  But, I don’t let it force me to take aggressive actions.  There is a point where I will hedge everything, but that is around 2600 on the S&P 500 at present.  I sit and worry a little, let Portfolio Rule Seven trim a little as my stocks hit new highs, but I won’t let cash go over 20% — we’re at about 16% now.  After I Bumped Against My Upper Cash Limit, I bought more stock — good thing too, at least in the short run.

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If you think this is all a mirage, and there aren’t any structural reasons why the market should go any higher, and you are not going to do anything here — well, good for you.  Maybe you are right, and you can buy lower someday.  Just don’t get jumpy if the market continues to rise, and you don’t have much in the game.  (To those so inclined, don’t be macho fools and try to short into new highs — wait until there is some blood on the sword before shorting, something that I almost never do because of the bad risk/reward tradeoff.)

But if you are feeling jumpy and think you should get in on the action, let me give you two words: “Do Half.”  If at normal valuations you would have 60% of your assets in stocks, and you have nothing in stocks now, don’t take position above 30%.  Go up to half of a normal position.  If things continue to go up, you will be happy you have something in the market.  If things go down you can bring it up to a full position on weakness, and be grateful you didn’t go up to 60% all at once.

Now, I’m not telling you to buy anything, invest with me, or anything like that.  I just know that regret is one of the most powerful forces in the market, and lots of people make stupid decisions under its influence.  Rules that I use, like “Do Half” and the portfolio management rules are designed to keep me from making rash decisions influenced by my emotions.

The same “Do Half” rule could be applied to lightening up on bond positions and other matters, like raising cash or edging into commodities.  (I am doing neither of those now — they are just examples from others that I know.)

The main idea is to be self-controlled, and not let emotion drive you.  Investing is a business; determine your policies, and act on them, whether you do it yourself, or farm it out to others.  But if you feel that you have to do something now, then my advice to you is “Do Half.”  But if you feel that you have to do something now, then my advice to you is ‘Do Half.’

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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