American (Market) Gladiators
The revival of one of my favorite shows from the late 1980's, American Gladiator, had me thinking about the battles individual investor face on a daily basis.
In Gladiators, contestants utilize their strength, agility and speed to avoid behemoth gladiators who are attempting to prevent them from finishing a variety of challenging tasks.
It's tough enough to scale a wall, but try doing it with a gladiator tugging at your heels.
Sometimes the market acts like it has its own army of gladiators attempting to prevent us from our goals. I'm sure I'm not the only one that physically feels the punishment that market gladiators can hand out in attempting to prevent us from our goal of market beating returns.
For example, let's take a look at gladiator - Volatility. Wide swings in the market can throw even the most prudent pro off his game like those contestants on the show.
Last week in my inaugural post I laid out a well executed plan that was premised on a portfolio long certain sectors, including homebuilding, and short world markets. Well, not one week later and housing stocks are roaring.
Arghhhhhhhh! What to do now?
Oh well, I will not let the Volatility gladiator throw me off my game. While it would be tempting to wait for a correction, I'll just have to ignore the short term action and stick with my strategy of establishing long positions in sectors that I believe to be undervalued.
I'll do that buying over time using exchange traded funds. The sectors that I will focus on are the homebuilding, consumer retail, technology, and banking industries.
For homebuilding I will use I Shares Dow Jones Home Construction Fund (ITB). The I Shares Dow Jones U.S. Consumer Services Fund (IYK) will provide exposure to consumer retail. The I Shares S&P Technology Index Fund (IGM) will suffice for technology sector.
In banking and finance I will use 3 different I Shares funds: broker/dearlers (IAI), regional banks (IAT), and Financial Services (IYG).
I will allocate $150,000 to each of these 4 sectors beginning with $25,000 positions or 1/6th of the expected total investment. For the banking sector the total investment will be $50,000 in each of the three funds.
What is important at the end of the day is sticking to my strategy. The most Rational approach is to adjust our allocations from time to time, but don't get distracted by the day to day gyrations of the volatility gladiator.
Note: I was unable to place a trade in the Rydex Strengthening Dollar Fund. I will search for a replacement and announce that trade in my next entry.
Jamie Dlugosch
The Rational Investor
Comments: View Comments | Friday February 1, 2008 | Stocks: IAI, IAT, IGM, ITB, IYG, IYK,
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Archive Comments (2)
I was also unable to make a trade with Rydex, although it was the weakening dollar fund. I have been torn about which way to go with the dollar and I finally decided on a weakening dollar because of the latest rate cut. It may be the wrong call, but I estimate it will be up to another 6 months before the dollar bottoms out. My currency positions are small, mostly for diversification purposes.
I do like your easing into your positions with the 1/6 rule. The patience will pay off in the end if you can stick to it . . . sometimes it's difficult if there is a quick 4-6% pop in the middle somewhere. I am going to employ a more aggressive stance when I begin buying short squeeze candidates, a "double down times 3" based on a falling price. Great post.
---Jonathan
Posted by Jonathan Coyle February 1, 2008 3:59 PM
Sam Black:
Why long when the VIX is over 24 on a 20 day moving average? All these portfolios looked pretty good until the past 6 months. VIX hit 20 in Sept. Safe play zone has been 1-16. Go to alternatives like GLD and currency plays. Am I wrong ?I enjoyed blog. Thanks.
Posted by Sam Black February 9, 2008 8:46 AM