“Coming Soon: The Big Trade-Off” – Thomas Friedman’s Editorial

This morning's Oregonian carried a recent editorial by Thomas Friedman.  Here is the link to the full article.  What I found frightening in the article comes mid-way and it is a survey by the Employee Benefit Research Institute.  They found that a "sizable percentage of workers report they have virtually no savings or investments."  Among those workers polled in its retirement confidence survey, "29 percent say they have less than $1,000.  In total, more than half of workers (56 percent) report that the total value of their household's savings and investments, including the value of their primary home and any defined benefit plans, is less than $25,000."

The results shocked me.  I've read such numbers before, but not to the degree and high percentages stated in this survey.  Friedman has it right in his first two paragraphs.  "U.S. foreign policy in the age of Alzheimer's."

Photograph: Cascades – John Fitzgerald, photographer

VWO And The ITA Risk Reduction Model

During this most recent market dip, if one asset class needed protection, it was emerging markets.  Just how did our Tactical Asset Allocation (TAA) or risk reduction model work with the VWO ETF.  Here is the current price and 195-Day EMA graph for emerging markets (VWO).  This morning the 195-Day EMA is $40.80.

Since I rotate my review of different portfolios, the selling points differed for the five ITARR portfolios.  Here is the data.

Maxwell:  Sold VWO on 5/08 for $41.4.  Buying back in right now could be beneficial.

Euclid:  Sold VWO on 5/11 for $40.32.  This move is only going to be profitable if VWO moves lower.  The closing price on 7/30 at $40.15 is very close to the sold price.

Madison:  Sold VWO on 5/17 for $38.07.  This will most likely turn out to be a losing move.  The price of VWO will need to decline much further.

Kenilworth:  Sold VWO on 5/18 for $37.79.  Once more, this will likely turn out to be a losing move as it will cost more to get back in than the selling price.

Gauss:  Sold VWO on 5/29 for $38.07.  Again, this will most likely turn into a loss.  The only hope is for August to be a terrible month for VWO.

Should VWO continue to rise in price, the risk reduction move did not pan out very well for emerging markets.  Granted, the above data does not tell the full story as the cash, in most portfolios, was placed into bonds, TIPS, or U.S. Treasuries.  The interest earned on the cash is not taken into consideration in the above data.  Nor is the gain or loss in those "cash" holdings.  BND, TLT, and TIP increased in value over the few months we were out of VWO so this will offset the losses, should we incur any before moving back into VWO.

The only true way to see if the ITARR model is working is to track the Internal Rate of Return (IRR) value for a few years and see if that value gains or loses ground with respect to an independent benchmark such as the IRR for Vanguard's Total Market Index, the VTSMX.  We have the capability to check this within the TLH Spreadsheet.