Posts Tagged ‘Asset Class’
Thursday, June 6th, 2013
Why Selling Positions Should be Welcomed by You and Your Client
By Brian Livingston, General Manager of SIACharts
One of the hardest issues that an advisor has to face when making investment selections for their clients is to decide when it is time to exit a position. More often than we care to admit, it is the lack of being able to mentally accept selling a position that does the most damage to a portfolio. Whether it is ego by being unwilling to admit that we were wrong, afraid of the forthcoming conversation with your clients, perhaps you have no sell discipline, or maybe there is that nagging feeling in the back of your mind that keeps saying “but what happens if it turns around tomorrow?” Whatever that reason may be, and only you can truly know which reasons they are, being able to sell a position in a consistent rules based fashion is one of the most important things that you the advisor will ever do for a client.
(Some of the most successful investors in the world are more often wrong than they are right with their stock picks. However, the difference that separates these investors is they are able to minimize their losses on their wrong picks by getting out of positions quickly admitting that pick didn’t work and also stay in their winning picks for long periods of time.)
At SIACharts, we use a relative strength based approach to help our advisors determine from a macro to micro basis where they should be best placing their client’s assets. We define relative strength as “a technique that compares the performance of an asset class or holding against other asset classes or holding(s).” Relative Strength calculates which investments are the strongest relative performers by comparing each asset class or holding against the other available choices. Relative strength between asset classes gives us insight into money flow on a large scale. By understanding where money flows are moving, we can assess Risk vs. Reward for any asset class, sector, or group of investments. SIA’s database includes over 60,000 stocks, ETFs, Canadian and U.S. mutual funds, commodities, currencies, etc. which are analyzed daily to help understand these money flows.
With being able to see where the current strength lies, by default we also know where the current weakness is. Advisors are then able to exit positions as they start to exhibit this relative weakness and as a result they are capable of mitigating the damage before it potentially blows up the portfolio. As an advisor, you must be capable of getting beyond your personal biases and realize that the ability to sell positions is a healthy thing to do for a portfolio. Do not get married to a position. A true self-analysis will likely show that the most damage you have done to your client was your unwillingness to sell. By selling weakness and staying in strength, our advisors have been able to successfully see a reduction in drawdown for their portfolios helping to improve their performance. Combining risk reduction and improved performance with a defined rules-based approach has also helped our advisors gain an advantage in gathering new assets.
Let’s look at an example:
A typical Canadian advisor is usually over-weighted in Precious Metals, Energy, and Banks because that is what has worked for them historically and where a large part of the Canadian industry is focused. But with relative strength, we can help identify when we should be trading these sectors and when we should stay away from them. With the recent drop in Gold and Silver, let’s look back and see if we can find any relative weakness that may have hinted at an exit point that would have prevented the nasty hit those Commodities took that were possibly in your portfolios, from a macro to a micro level.
In the SIA Asset Allocation Model, Commodities were our top ranked asset class for part of 2011 and they moved down to the very bottom of our rankings at the end of September of that year and staying at the bottom ever since then. So from a macro asset class comparison, Commodities have been the weakest asset class that an advisor could have been in for the last 20 months.
From a sector comparison, at SIA we rank 31 different sectors each night to once again show you where the strength and the weakness may be within the North American market. The chart below is what we call a Relative Strength matrix position chart, and in this case, we are looking at the Metals and Mining sector. On May 11, 2011, the Metals and Mining sector moved from the Favored zone (the strongest sectors) into the Neutral zone and soon after into the Unfavored zone (weakest sectors). This was the indication of weakness against the other sectors that our advisors would be seeing that would be telling them they needed to be exiting out of that sector and moving into something stronger. We can see this sector continued to move down to the bottom of the rankings where it has stayed for over a year and a half.
The next screen cap below shows the bottom ranked weakness right now in our sector analysis comparisons. Banking, Energy, and Metals and Mining are all down in the bottom 5. How much better off would your client’s portfolios be right now if you had sold out of that weakness and returned that capital back into something that is stronger and healthier?
Looking at it now from an individual prospective, back on April 8, 2013, SIA did an analysis on Eldorado Gold (ELD.TO) showing roughly where the position was stopped out and how it had moved subsequently. As you can see below, by having the willingness to sell this stock and move on to a new position that was relatively stronger, this would have saved an approximate 40% drop (as of the time of writing this article ELD.TO is up approximately 1.5% since April 8, 2013).
Performance is a great thing to have, but the ability to not lose money for your clients is just as important or even more important. Being proactive in your approach to selling positions when necessary should help you minimize losses, improve returns, and most importantly increase the confidence that your clients have in you.
Copyright © SIACharts.com
Tags: Asset Class, Asset Classes, Asset Insight, Assets, Brian Livingston, Choices, Consistent Rules, Discipline, Ego, Fashion, Important Things, Insight, Investments, Investors, Large Scale, Long Periods Of Time, Losses, Money Flow, Money Flows, Relative Strength, Risk
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Saturday, August 28th, 2010
For the past two years, I have been a regular contributor to Horsesmouth.com, the leading practice management website for U.S. financial advisors.
In late March, I read a column in Horsesmouth by Debra Taylor, a New Jersey financial advisor who wrote about four lessons from a conference in Palm Beach sponsored by Barron’s that she had recently attended.
While written almost six months ago, these four lessons are just as relevant today and I reprinted them with her permission.
For several days, Barron’s Top 100 Women Financial Advisors in America (and another 400 women advisors who attended by invitation only) discussed their practice management ideas, investment philosophies, and what has worked and not worked for them during the past year.
The Top 100 women all had minimum assets of $250 million each (and most had much more), and many of them had overcome additional roadblocks on their way to the top.
Lesson One: The need to validate your process
The first lesson was that no single asset will save the day.
One of the common themes of the conference was that every asset class courts risk: opportunity risk, credit risk, market risk, and so on. Therefore, although bonds may have saved 2009, when inflation kicks in, this approach will catch up with you.
Every investment recommendation should serve multiple purposes-for example, dollar hedge and inflation protection. In addition, advisors should always be concerned about downside and stress-test everything.
Participants were also urged to think carefully about the sources of information they relied on.
Some clients want to know that they can rely on your recommendations, so they need to confirm your research process.
Debra Taylor wrote that she is being asked this question more than ever before, and comes prepared to every meeting with her research binder and other examples of her investment process and performance.
Lesson Two: The need to tighten your ship
A second message from the conference that Debra Taylor wrote about was that everyone on an advisor’s team needs to operate as a unit and be organized, just as they would be in the military.
Over and over, advisors heard from top producers that they should fire borderline staff and keep only the A players. As hard as this may be, it is a recurring theme of these top producers.
These top producers all shared stories of revolving-door turnover, new hires that didn’t make it through the day, and so forth. Throughout the industry, advisors find it hard to hire quality people who are truly passionate about their jobs.
Of course, to maintain and motivate the A players, advisors should compensate well and continue using incentive bonuses.
And top advisors often reiterated the need for uniform systems and morning meetings (or “huddles”.)
One ongoing theme of top advisors with large teams was to have a chief of staff or chief operating officer on your team to manage the troops and keep the team on target and accountable. More and more, Debra Taylor talked about seeing that higher-producing advisors have a COO so that the advisor can focus on client relationships and sales.
Lesson Three: Focus on the client experience
Charlie Johnston, President and CEO of Morgan Stanley Smith Barney, discussed the evolution of the financial advisory business and highlighted the need to strive for investment excellence, which he believes is becoming critical again.
He also discussed the importance of the client experience, and focused on the client discovery process, listing several key questions as critical:
- What does money mean to you?
- What do you try to teach your children (or grandchildren) about money?
- If you could give just one thing to your children, what would it be?
- What are the values you hold most dear?
- If you could live your life over again, what would you do differently?
- Of all the gifts of your time and money that you have given to charity in the past years, which was the most meaningful to you?
- If your doctor gave you 24 hours to live, what would be your biggest regret?
Tags: 100 Women, Asset Class, Class Courts, Credit Risk, Debra Taylor, Financial Advisors, Horsesmouth, Inflation Protection, Investment Philosophies, Investment Recommendation, Management Website, Market Risk, Palm Beach, Practice Management Ideas, Risk Credit, Risk Market, Risk Opportunity, Roadblocks, Stress Test, Target
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Wednesday, February 3rd, 2010
Even with the recovery in the last nine months of 2009, many clients are still anxious about owning stocks.
If you’re running into nervous clients, you might want to refer to a recent interview with Jeremy Siegel, the Wharton academic who’s the leading authority on long term asset class returns.
A link to the full interview is below. Among the key points Siegel makes:
- Stocks today are fairly valued based on current earnings – and over the next year will likely offer better returns than bonds and cash
- Why stocks are likely to be significantly higher by 2012
- Inflation is not going to be a concern in the near to mid term
- The reason US deficit spending isn’t the biggest cause for concern going forward
- Why the last ten years have been so miserable for stocks – and the reason that investors can expect after inflation returns of 6 to 7% on stocks going forward
Here’s the full article: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2411
And for clients who’d like to watch Jeremy Siegel talk about his views, below are five short video interviews he did last September that you can email to clients.
Stocks for the long run and long term returns http://www.clientinsights.ca/video/stocks-for-the-long-run-and-long-term-returns/type:investor
The growth trap and the role of dividends http://www.clientinsights.ca/video/the-growth-trap-and-the-role-of-dividends/type:investor
Looking back on the past ten years in markets – what went wrong http://www.clientinsights.ca/video/looking-back-on-the-past-ten-years-in-markets-what-went-wrong/type:investor
Today’s valuation levels and market outlook http://www.clientinsights.ca/video/today-s-valuation-levels-and-market-outlook/type:investor
The case for international investing http://www.clientinsights.ca/video/the-case-for-international-investing/type:investor
Tags: Asset Class, Bonds, Deficit Spending, Dividends, Earnings, Expert Evidence, Fears, Inflation, Jeremy Siegel, Last September, Last Ten Years, Leading Authority, Market Outlook, Nine Months, Stocks, Term Asset, Upenn, Valuation Levels, Video Interviews, Wharton
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