Financial markets are not static. What works now might not
work tomorrow. Sometimes what worked in the past will start
to work again. Market forces push prices thru the theoretical
correct price and back from one side to the other of this
correct price. Accepted calculation of theoretical correct
price based on discounted future cash flow, is easy to understand. However
it is not fool proof as future earnings and appropriate discount
rates are estimates. It's not easy for an individual to wade
thru all the info available and make money on stock equity.
I've been increasingly enthused about ETFs, Exchange Traded
Funds. In DIY Portfolio Management, I recommend SPY* or a
mix of a few large ETFs as good strategies for those who don't
want to invest a lot of time or assume a lot of risk. The
appeal of holding ETFs comes from low expense ratios, diversification,
and tradability. ETF expense ratios range from .2% to a high of
.95%. ETFs are baskets of equities, usually designed to mimic
the performance of some index, thus reducing risk of holding
individual equities. ETFs trade all day long, like stock equities.
ETFs are becoming increasingly popular. There is more and
more info about ETFs on the net, just google ETF. In 1993
there was just one ETF, and by April 2006 www.ETFconnect.com
listed 234 ETFs.
Starting in 2004, I've been paper trading Trend Regression
Portfolio Strategies using models with 50 ETFs. Paper results
looked good with these accounts beating the market.** I switched
one of my real money accounts to a traded ETF strategy in
March 2005, and expanded to a second account in November.
The oldest account grew 29% from 3/28/05 to 4/1/06, compared
to a 13% return for SPY. The newer account grew 12% from 11/7/05
to 4/1/06; SPY grew 7% in the same period.
These strategies are funded at FOLIOfn. This broker works
for me because I focus on managing portfolios rather than
investing in individual equities.
My oldest funded ETF account is a mix of a daily price and
a weekly price models using the same 50 ETFs. The ETFs were
picked primarily based on length of trading history. The newer
account adds continuous holding of 6 large ETFs.*** The total
number of ETFs held varies week to week, from 9 to 12. Both
accounts are always 100% invested. The newer account blends
'buy and hold' and Trend Regression Portfolio Strategies in a single account.
The performance of these strategies has been good relative
to SPY. I don't know how long it will last. My experience
has been that models work for a while then fade. I'm not sure
yet whether it is because the models just stop working or
because my focus shifts. Anyway! The point is not that the
outstanding performance of these ETF models makes them terrific
strategies, but that it is possible to beat the market. Remember,
beating the market takes work, discipline, and acceptance
of risk. For most individual investors busy with their lives,
it is probably best to lock in a market return by buying SPY.
SPY is the ticker for S&P Depositary Receipts the
ETF designed to capture the total return of the S&P
500 index. SPY mimics the S&P 500 index by holding stock
in all 500 companies in the index in the same proportions
as the index itself. SPY is the oldest ETF (inception 1/29/1993),
the largest ($51 billion net assets), and is the second
most actively traded (62 million shares per day average).
I'm defining the market as the S&P 500 index. SPY
has a beta of 1. An account with a higher total return than
SPY is beating the market. SPY is a pretty broad measure
of the US market. If you are thinking global you can use
a broader index. I use one created using a paper-trading
account with 5 ETFs rebalanced weekly. This index gained
19% between 3/28/05 and 4/1/06. The actively modeled/managed
ETF account's gain on market depends on how you define the
market.
The six large ETFs are SPY (for broadness), DIA (for tradition),
QQQQ (for tech), EFA (for international), EWJ (because my
wife is Japanese), and EWC (because I'm Canadian).
Lyle Wilkinson, investor, trader, author , MBA . Helps
individuals learn to self direct their stock portfolios. Book,
e-book, PowerPoint "DIY Portfolio Management" http://www.diyportfoliomanagement.com[email protected]
