Monday, March 12, 2007

What Part of "Global"

Tom Lydon submits
Portfolio diversification is always important and one way to diversify is to go global using ETFs.
And then he enters a link to someone over on Motley Fool (and you know how much I respect them) that says to use ETF's to broaden your loss - uh - diversify your portfolio because, as everyone knows, when the U.S. is in recession far away places just go boom.

Now I know that you all agree with me that the U.S. economy is either always going into recession or coming out of recession and only people with the kinds of tools that I provide can see this clearly and that everyone else has to rely on the U.S. Government a body of individuals we all trust for their honor and integrity in all things - right?

OK - one of the ETF's that the Motley Foolish One suggested was EFA. So using Marlyn's amazing tool - the Curve let's take a look - shall we?

EFA is wearing red and the other one - SPY (the United States stock market) is wearing black (fitting for the occasion - don't you think?)

So what do we see - wow - the EFA goes right along with the United States stock market - oh my - does that mean I can beat recession, depression and the punishing heartbreak of psoriasis - no - I can't - and neither can you investing in a foreign ETF that participates in a "global economy".

So how did Marlyn know this? Simple - Marlyn bought into this argument back in the 90's and was about one-third into MSCI EAFE index funds to "recession proof" his core, retirement portfolio, and that is one of the many reasons Marlyn has to day and swing trade now instead of enjoying himself on a warm beach some where.

Some beach! - and that's exactly what I said when I got my final quarterly report from those funds - final because the next day they were no longer participating in my
recession proof

But as I always say - your money - your trade.


MachineGhost said...

I believe one reason it's so difficult to achieve true "diversification" is the lack of inexpensive portfolio-level optimization software for that factors in both correlation (Beta) and non-systemic correlation (R2) and relies on Monte Carlo for future projections.

Current software is outrageously expensive (sure sounds like job-protection for financial planners to me!) and/or requires you to manually input a limited set of tickers per optimization run.

Nonetheless, two such software I like are Quantext Portfolio Planner ($60/year) and Portfolio Optimization ($18) from ExcelBusinessTools. I am undecided which is better for end results.


Marlyn Trades said...

I agree - but I do have some thoughts and will be making a post in the future regarding this issue. I'm going to include your comment here as part of it. Probably this weekend.