My topic for today’s meeting will be a tactical one, and I hope to answer the question, “How can I limit the risk of the fundsI put into a given mutual fund?”

I use mutual funds for general asset allocation, usually for funds in taxable accounts to minimize taxable sales. (I use my retirement accounts for trading that typically creates holdings of less than 1 year.) At times, I might choose to invest large amounts in a single mutual fund to get to my asset allocation targets (e.g. 20% in international stocks).

If international stocks or gold stocks go down a helluva lot (which they have great tendency to do), do I just accept it as my fate? Not I… So, how do I limit my risk?

Every day, Trading Markets has a web link to Everything you need to know for day-of-the-week. Consistently in the past week, nothing’s been out of the 3, 4 or 5 range, which based on their site means that none of their indicators are leaning in any particular way on these stocks. While they don’t tell you want indicators are used in the PowerRating formula, I’ve found that you cannot get a PowerRating on any stock that hasn’t been trading for more than 200 days. A “How To” for PowerRatings can be found here. Based on their studies which have been back-tested to 1995 (yeah, I know, it’s relatively easy to find something that would have worked if you only knew about it), stocks rated 9 or 10 have on average been the S&P 500 over the next 5 days by a better than 14-1 margin. The success rate? Unsure, and there’s a paucity of information that I could find by searching for independent testimonials, independent commentary, or external reviews of the PowerRatings system.

Make no mistake, there’s something slightly shady about this since everything on the site points to standard glitz and glam to make things look so easy. What I’ll do over the next month is come up with several batches of stocks (let’s say 30), get PowerRatings on this batch and see how the do after 5 days. I’ll do this as many times as I can and report the results here.

My daily routine is non-existant, mainly due to my investment choices thus far. As you both know my focus in on asset allocation coupled with dollar cost averaging within me and my SO retirement accounts. One account gets 2 installments per month, the another gets one installment per month, and our IRAs get one installment per year which I try to market time as much as possible within a range of 1-2 months in the year. My investment options are self limited at this point to index funds, since that allows me the ability to minimize expenses and go along with the research that shows that index funds out perform 80% or more of the actively managed funds. Since I cannot invest in many of the excellent actively managed funds anyway within my employer sponsored retirement accounts, I don’t bother looking too hard at the actively managed funds–not a good use of my time. (more…)

On a daily basis, I do a couple of things…

  • Daily news & chart briefing
  • Monitor news and markets during the day
  • Review positions to see if I should sell anything (preferably before close of day)
  • End of day review


I’m curious about what each Tasgall member does each day to keep a finger on the pulse of the world and the markets in particular.? For example, do you have a morning routine of blog reading or news watching?? What charts?and such do you check on a regular basis, if at all?? How often to you deal with your investments and in what manner?

My routine is constantly changing and growing, primarily because I’m constantly finding new sources of information from other people.? But this is what it typically involves:

  • A quick check of updated Bloglines feeds focused mainly on sites like Minyanville, Economist’s View, Big Picture, etc. and, of course, Tasgall.
  • Write something on Tasgall blog.
  • Log into Barchart.com ($) and check the latest futures charts for a general picture of commodities.
  • Pull up my FX accounts to see how things are looking.
  • Spend some time checking my personal finances to make sure everything is on track.
  • On weekends, rebalance my Uberman’s Portfolio (new).
  • Also on weekends, spend some hours throwing around new ideas and testing them.
  • In general, try to find?convergence between what I’m seeing and reading and hearing.

All in all, nothing too fancy or regimented, but it’s what I find myself doing day-to-day.? I’d like to peek into other people’s routines to see if I can adopt some good habits.

It’s time.? A project that I’ve been working on extensively for weeks, probably to the great annoyance of the lady of the house, is finally at a point where I’m ready to share my work and begin testing the idea in a semi-public forum.? The working title for this project is the Uberman’s Portfolio, inspired by the infamous Uberman’s Sleep Schedule in that it never sleeps and because of the many late nights spent building the?gears and levers that make it all?possible.? Also, the acronym is UP, which is where I hope my equity will be when all is said and done.


How Index Investing Harms Your Portfolio

I read about this a few months ago in the book Just One Thing?where Rob Arnott contributed a chapter and it really stuck out as a useful piece of info.

Now for the other point of view and more supporting arguments with charts.

If you’re looking to invest in CDs or a similar fixed income investment, consider loaning out part of your money at Prosper.com. You can invest in small amounts, start to get a pretty big boost to your yield, pay low fees (well, the borrower pays the fees), and get it all done with minimal hassle (everything can be done from a web browser).

You can take a larger chunk of money and lend it out in small amounts to many different people — the diversification should help with the risk that a person walks out on their debt. I believe all the loans are in 3 year repayment periods, so you’ll probably want to diversify across people as well as begin to ladder the loan over time.

Some obvious advice: focus on those with high credit ratings and a reasonable way to pay back the loan; don’t treat this like a charity and give money to the person who “deserves” it. Factor in expected defaults when calculating the return you’re willing to lend at.

Need to calculate the implied volatility of an at-the-money option on the fly and you left your Nobel laureates at home?? Not a problem…

IV = 40 x p / SQRT(t)

where p is the price of the option (as a % of the underlying) and t is trading days until expiration.

That’s all.? Forget all the complications of the million dollar formula as this gives you all you need.? However, it only works at-the-money, but then again so does Black-Scholes.

So what if the price is between strikes so there is no at-the-money?? Well here is another spiffy formula:

CM = 1.04 – 0.04 * R

where R is the ratio of the more expensive to least expensive options that are nearest to the money.? Just multiply your option price p above by CM and there you have it: the price converted to the at-the-money equivalent.


Since we’re all actively seeking yield, I figured you might want to know about this promo (and I can be a bit of a smartass at the same time):


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