Firstly, I came across a very well written piece by Stanley Druckenmiller over the weekend that I thought needs sharing. It is a very quick read about the dangers of today’s investment environment that you may consider before being 100% invested in stocks. Before you get the impression it is yet another permabear piece, Stanley Druckenmiller has certainly criticised central banks in the past however his conclusion around 2012 was the stock market will likely benefit from these policies for at least the next couple of years. So it is interesting to note his concerns now as he is changing tune.
I shall post a link shortly under a new category called “useful web links”. At the same time, I gradually will continue placing more web links in this area. To begin I shall put the web page of Meb Faber also. (not to be confused with the more well-known entertaining Marc Faber who is based very close by in Chiang Mai here where I spend about a third of the year). Meb has written 5 books and often focuses on top down quantitative analysis techniques that smaller investors can employ to tilt the odds in their favour. His book Global Asset Allocation is a quick and simple read and one which I feel captures the essence of what I am trying to achieve by keeping reasonably close to some asset allocation ranges that I have been comfortable with for a long time. You may possibly even be able to get this free by ebook by subscribing to his site. If not don’t hesitate to buy and let me know what you think, the key is about minimizing drawdowns yet importantly participating in nearly all the long term average returns that the stock markets offer.
Another technique some use to minimize drawdowns was covered in a book from Jeremy Siegel which has an edition updated post crisis “Stocks for the Long Run”. He tested a relatively simple 200 day moving average system basically staying in the market above the average and exiting below the average from1886-2012. From memory it only shaved off about 1.5% from the long term numbers each year. For example, 10% became 8.5% even after transaction costs. You may need to buy the book for more precise details or I will try and find a link to someone who has more details. Maybe it seems a lot to some but the dramatically lower volatility and largely avoiding big declines in 1929,1974,2000, 2008 etc provides food for thought. The key with techniques like these though are to know yourself well. Will you stick rigidly to it? In terms of the asset allocations in my case I can at least draw upon experience that I stuck to my guns in 2008. I have not really had much experience with the moving average technique above. I do however plan to use it on a small part of the portfolio when we next see a break below, in keeping it small I know I can stick to it. Just another small tool to minimize drawdowns yet still participate in the vast majority of the long term upward trend of the equity market.
Please check the category “Useful web links” to read specifically in detail about what I mentioned above related to Stanley Druckenmiller, Meb Faber and Jeremy Siegel.