Market timing isn't easy and investors should instead work on risk analysis, according to Barry Ritholtz. "The data overwhelmingly shows that no one is ever going to make a risk assessment that allows them to top tick on the way out going to 100% cash at the highs and bottom tick at the bottom, going all in."
Instead Ritholtz says investors should try to 1. Identify trends in the market 2. Watch if earnings are rising or falling 3. Figure out whether stocks and cheap or expensive 4. Are interest rates going up or down 5. Identify what the corrections mean for your portfolio 6. Better grasp market volatility and risk viz-a-viz opportunities 7. Ask yourself, "Am I taking advantage of mean reversion to rebalance my holdings based on asset class?.
Traditionally only the very wealthy and institutions bought structured products that the Wall Street Journal defines as "complex and opaque investments packaged by investment banks based on derivatives, such as options, indexes, commodities or swaps."
Banks are now trying to make these products, that are being closely watched by Finra, available to independent advisors as well. While some tout these products because of the gains they can bring, others warn that they can be expensive, carry a lot of risk, and are difficult for clients to understand.
"Households directly own 38 percent of the U.S. equity market," according to Goldman Sachs' David Kostin. When you take into account mutual funds, pension funds and insurance policy holdings however that number goes up to about 80 percent. Hedge funds it turns out only own about 3 percent.
How Bill Ackman Constructs His Portfolio (Advisor Perspectives)
In an interview with Advisor Perspectives, legendary hedge fund manager Bill Ackman said his active investments have offered him higher returns. He also described how he constructs his portfolio.
"We think having 8 to 12 core positions at a time provides an adequate degree of diversification, while allowing us to concentrate in a handful of ideas that we know very well and believe have highly favorable risk/reward characteristics. If our capital base were permanent, we’d probably only do active investments. But it isn’t, so the fact that I don’t ever want to be forced to sell an active investment in the course of an engagement means we also need to hold passive positions. Historically, around 55% of our portfolio has been in active investments, 15% or so has been in cash, and the balance has been passive."
Howard Marks Tells Us How To Invest In Uncertain Times (Oaktree Capital)
Howard Marks says the world is a more uncertain place today that in "any time in my experience." In a presentation he points out "black swans, landmines and long-term problems," and based on these he puts together an investment blueprint in which he tells investors to tread with caution.
In his section titled "prescription for an uncertain world", Marks tells investors to 1. Moderate their expectations 2. "Emphasize corporate investments" 3. "Commit to active decision making" even if it is choosing to do nothing 4. "Remember the reasons for caution aren't imaginary" and 5. "Balance the pros and cons".
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