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The role of alternative securities in accomplishing true diversification during difficult markets
August 10, 2011
The intraday fluctuations, over each of the last six days, are similar to what would be expected during several months. Former rational investors have transformed into a mass of emotional crazies who are all selling at the same time. Monday the Dow was down -630 points. Yesterday afternoon, when many were ready to jump out the window, someone yelled…..BUY!!! The market gained back most of the previous day’s decline in about the last 30 minutes, closing up +430 points. The “crowd” went home thinking all was right with the world. Well, at least until today….. SELL!!
The masses are again getting caught up in the market and media noise and, like in the past, will do the wrong thing at the wrong time. It is like being locked in a theater and forced to watch the same bad movie over and over again. The truth is that traditional diversification does not work. If it did work, then investor’s portfolios would not be so volatile.
Today, we have many choices that were just not available just a few years ago. For example, we can use Exchange Traded Funds (ETF) to invest in various currencies like the Swiss Franc or Japanese Yen. We can now own individual commodities like gold or silver. During bear stock markets, one can own inverse securities that go up when their underling index is going down like the S&P 500 inverse ETF. There are “alternative” market securities. All of the securities mentioned are up over the last couple weeks while the stock market is down. The goal is to create true diversification resulting in a stable upward trending portfolio.
As of last Thursday, most major stock markets entered a bearish market condition. The long term stock market trend is now down. Volatility is high and increasing which is also bearish. The short term technical indicators are bearish.
What should we do? High volatility tends to fluctuate both up and down, as witnessed yesterday’s +430 point gain. A day feels like a month. Use a little patience and don’t get caught up in the noise. We will continue to use short term rallies to exit underperforming securities and will continue to shift, primarily to alternative securities in bullish market states (conditions). It is important to use a scientific process to manage the many moving parts within a portfolio and to determine specifically what adjustments to make and when to execute.
Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.