Ed Mamula.com

It’s official. I am sick of the stresses of 24 hour trading on a short term chart. In my opinion, Tradestation is not designed with traders like me in mind. Now, if my returns had been stellar, I suppose I could soldier on…however, things have been very volatile, and when I tally everything up, I have earned roughly $5000 over the last 4 years as a systems trader. Well that beats the market, so there’s that…but then again, stuffing my money under the mattress and getting a second job at McDonalds would have been more lucrative.

Well why has currency trading been stressful while investing for retirement via an IRA seems relatively easier? I think it boils down to the idea that the strategy employed in the IRA (buy and hold) would ultimately work if given enough time. That could never be said about a short term system that could fall apart at any given time…

And so, as I was drafting some guidelines for the next iteration of my active trading, I read the Ivy Portfolio and noticed the launch of the GTAA ETF….

For the record here are those guidelines:

No leverage
No intraday trading
No drama (Usually related to gun-slinging “discretionary” trades with or without high leverage)
No monthly fees
No proprietary platforms

I have decided to use GTAA as a benchmark for my own Tactical Asset Allocation model. For now, I only have an absolute returns version of my model, and GTAA is an absolute returns fund, so the benchmark is appropriate. However, I also have my eye on the model over at MarketSci, which is likely to be geekier and more elegant than my absolute return model, but nevertheless, for now, I will be using that model as a secondary benchmark. The positions for my model for November 2010 are :

VEU / VWO

The model (if it can even be called that at this point) always purchases equal parts of the top two assets, so clearly there is some room for improvement.

To reiterate, this is never investment advice.

More to come…

Nowadays, market cap weighted index funds and ETFs (Exchange Traded Funds–these trade just like a stock) are widely available at a very low cost.  While it is always fashionable to try to devise ways to beat the market averages, investors’ collective track record for doing so is quite poor.  So even if these index funds don’t represent some sort of mythical ideal, they surely do allow us an easy, inexpensive way to build a global, diversified equity portfolio. 

If market cap indexing is a good strategy domestically, it would follow that it should be a good investment internationally as well.  Interestingly, I’ve seen a few global indexes such as the one offered by Russell, but I have yet to see a single mutual fund or ETF that provides a market cap weighted portfolio of the entire world.  The products that I see are usually more along the lines of single country funds and “all world except for country X” funds.  That still makes it pretty easy to build the portfolio.  All we need are two funds, and an idea of what percentage of our money to put into each one.

 Let’s start with the funds.  While there are certainly other options, I will use Vanguard ETFs as an illustration, because they are generally recognized as low cost index fund pioneers.  We can build the portfolio with Vanguard’s Total Stock Market ETF (ticker VTI) to cover US Equities and the Vanguard FTSE All-World ex-US ETF (ticker VEU) to cover all other countries.  With just two instruments, we get low cost exposure to more than 95% of the global investable universe. 

Since we’d like to be market cap weighted, all that remains is discovering the USA’s percentage of world market cap…(insert Jeopardy theme music)…okay, this was surprisingly difficult to track down, but the World Federation of Exchanges does publish this data on a monthly basis.  Using their monthly domestic market cap figures, I have the US share of global market cap at roughly 40% as of this writing.

So that’s it!  40% goes into VTI and 60% goes into VEU.  We can check the World Federation of Exchanges data on a yearly basis to ensure that our portfolio is still representative of world market cap.  Except for the real world nuisances of adding additional capital and dividend reinvestment, the beauty of this plan is that it never needs to be rebalanced.  Remember, we are not setting some arbitrary division like 50% US and 50% rest of world.  We are simply investing in the entire world by market cap weight.  Whether the US percentage of world market cap shrinks or grows in the future, our portfolio will automatically reflect it.

  Keep in mind that this was just one example, and it’s provided for illustration only…your mileage may vary…blah blah blah…etc….I am not an investment advisor.

Now as soon as someone gives us a good All-World in One index fund option, this plan will get even simpler…100% in one fund…set it and forget it!