Opinion

John Wasik

Betting on Bear funds 2013 may be hazardous to your wealth

Feb 11, 2013 21:12 UTC

CHICAGO (Reuters) – There is such a thing as being too cautious – betting on fear to such an extent that it derails your portfolio.

But if you are pessimistic about economic prospects in 2013 and thinking of investing in some bearish funds, this strategy could be hazardous to your wealth. You should consider yourself forewarned by what happened in 2012 with funds that embraced an aggressive bearish strategy: They were mauled.

Take the iPath S&P 500 VIX ST Futures A ETN, which was one the most hotly traded funds in 2012, according the Top 20 list of average daily trading volume compiled by trade newspaper Investment News. This specialized fund is an exchange-traded note – a publicly traded instrument issued by a bank – which gains when volatility-linked futures contracts soar in price. A short-term measure of investor anxiety, these funds make sense when the market is topsy-turvy, but not in a bull rally. Last year, the iPath note lost 78 percent.

Another big, bearish loser, the Direxion Daily Small Cap Bear 3X Shares fund, lost 49 percent of its value last year. The fund, which gains three times what a small-cap index does during a decline, was 10th on the top-volume ETF list.

Overall, a pessimistic view was represented by eight bearish, non-precious metals funds in the high-volume, hot-money list. All but one of them lost – from 12 percent for the ProShares Ultrashort 20+ Year Treasury ETF, which makes money if prices on long-maturity Treasury bonds fall, to the ProShares Ultra Vix Short-Term Futures fund, which lost a heart-stopping 97 percent last year and offers twice the return of an S&P 500 volatility index.

COLUMN: Battling the unknowns of currency devaluation

Feb 8, 2013 18:01 UTC

CHICAGO (Reuters) – Owning a truly globalized portfolio means investing in both developed and emerging markets, but figuring out the right mix gets complicated when you consider currency risk.

In just the past few weeks, a new Japanese stimulus policy that has been easing the relative value of the yen is the latest thing upsetting global trade.

More countries may soon get into the currency devaluation game, too. The Bank of England, in trying to avert another recession, may adopt U.S. Federal Reserve-style quantitative easing policy moves to jump-start the British economy. The pound has already fallen some 3 percent against the dollar in 2013 in anticipation of that move, according to BMO Private Bank.

Battling the unknowns of currency devaluation

Feb 8, 2013 17:58 UTC

CHICAGO, Feb 8 (Reuters) – Owning a truly globalized
portfolio means investing in both developed and emerging
markets, but figuring out the right mix gets complicated when
you consider currency risk.

In just the past few weeks, a new Japanese stimulus policy
that has been easing the relative value of the yen is the latest
thing upsetting global trade.

More countries may soon get into the currency devaluation
game, too. The Bank of England, in trying to avert another
recession, may adopt U.S. Federal Reserve-style quantitative
easing policy moves to jump-start the British economy. The pound
has already fallen some 3 percent against the dollar in 2013 in
anticipation of that move, according to BMO Private Bank.

With Dow breaking 14,000, what should you do?

Feb 4, 2013 17:53 UTC

CHICAGO (Reuters) – Whenever the stock market breaches an old high – like when the Dow closed over 14,000 on Friday, the best mark since October, 2007 – it is time to look inward, not outward.

You could be happy that your portfolio looks pretty good, or you could remember how you felt in 2007 after feeling optimistic, then only to be crushed soon.

Given that you probably have a lot of year-end and tax-related statements coming in right now, you will see a lot of material to evaluate your investments. What to do next? Sell off winners? Hedge against a fall? Pick up laggards before they, too, go on the upswing?

Put your investment enthusiasm on a dimmer switch

Feb 1, 2013 13:30 UTC

CHICAGO, Feb 1 (Reuters) – Whenever there is an extended
rally in the stock market, blazing lights go on in the heads of
Main Street investors, signaling that it is time to join the
party.

As the S&P 500 reached a five-year peak at the end of
last week, on top of a 13 percent gain for the index last year,
enthusiasm for stocks approached fever pitch. More than $55
billion in new cash flooded in to stock mutual and
exchange-traded funds in January, according to TrimTabs
Investment Research. That is the biggest monthly inflow on
record, beating the previous record set in February 2000.

What to make of this exuberance? Investors are seeing a
clearer horizon after the “fiscal cliff” came and went without
hurting the market. Pending home sales took a dip in December,
but were up nearly 7 percent for the year, according to the
National Association of Realtors. Corporate earnings also look
relatively strong, with earnings growth of 2.5 percent expected
in the fourth quarter of last year, reports Factset Research. A
renewed prospect of personal wealth is piggybacking this
positive news.

How to hold fickle commodities in your portfolio

Jan 28, 2013 19:36 UTC

CHICAGO, Jan 28 (Reuters) – Commodities are among the most
skittish investments. Not only do they react to global economic
forces, they can seesaw with supply and demand, China’s
voracious appetite for raw materials and the weather.

Since commodities are tangible things that are mined or
grown, they are hard to hold and often bought through futures
contracts, which have their own peculiarities. Yet what is
undeniable about commodities is that they are usually a good
tracker of broad economic growth, inflation among producer
prices and they run inversely to the dollar’s decline. You
should have a piece of them in your portfolio, but you have to
be careful about how you hold them.

Here’s how strange commodities are: Even though there was
growth nearly everywhere except for Europe last year,
commodities, as measured by the Dow Jones/UBS commodities index,
declined 1 percent. That compares to a resounding 16 percent
gain for the S&P 500 index of large U.S. stocks with dividends
reinvested.

Curing the curse of the bandwagon effect before the next crisis: John Wasik

Jan 28, 2013 15:51 UTC

CHICAGO (Reuters) – During a market crisis, when everyone wants to jump off the ship in the same leaky lifeboats, that doesn’t bode well for most individual investors, who simply want to preserve capital.

The safeguard is to move against what behavioral finance experts call the “bandwagon effect” — when so many investors follow the same path that they disrupt the traditional correlation of assets.

This is what has happened when Modern Portfolio Theory (MPT) — a bedrock of investing that advocates diversifying your portfolio to temper risk and boost returns — met big institutional investors who employed the idea on steroids, plowing money into alternative investments from leveraged hedge funds to timber.

Curing the curse of the bandwagon effect before the next crisis

Jan 25, 2013 18:08 UTC

CHICAGO, Jan 25 (Reuters) – During a market crisis, when
everyone wants to jump off the ship in the same leaky lifeboats,
that doesn’t bode well for most individual investors, who simply
want to preserve capital.

The safeguard is to move against what behavioral finance
experts call the “bandwagon effect” — when so many investors
follow the same path that they disrupt the traditional
correlation of assets.

This is what has happened when Modern Portfolio Theory (MPT)
– a bedrock of investing that advocates diversifying your
portfolio to temper risk and boost returns — met big
institutional investors who employed the idea on steroids,
plowing money into alternative investments from leveraged hedge
funds to timber.

Disclosure won’t help money fund investors

Jan 22, 2013 18:30 UTC

CHICAGO (Reuters) – The $2.7 trillion money market funds market is in line for new regulations as the Securities and Exchange Commission ponders new rule changes that would give investors a better idea of how much risk they’re taking.

But no matter what happens, the funds will still be relatively safe baskets for short-term cash, though afflicted by paltry yields for the near term.

The biggest change that might come about is increased transparency. The SEC tabled a proposal late last year on a set of rules and now the matter is being reconsidered, although it may not be acted upon until a new, permanent chairman is appointed and one of the empty commissioner’s seats is filled. Another proposal before the Financial Stability Oversight Council may require that managers set aside capital against losses or price funds at the actual net asset value.

Five red flags for municipal bond investors: Wasik

Jan 18, 2013 16:43 UTC

CHICAGO (Reuters) – There is a bubble forming in the municipal bond market, and millions of investors could be impacted if it bursts.

In the coming months, as Congress and the White House wrestle over the next budget, debt ceiling and new sources of revenue, volatility is likely to roil the muni market. Skittish investors had triggered a minor sell-off in December. Yet despite a 1.2-percent loss in the last month, the Barclays Municipal Bond Index gained 6.8 percent overall in 2012.

Munis avoided the chopping block in the last round of fiscal cliff negotiations, but that does not mean they are in the clear. They are still vulnerable in the debt-ceiling negotiations since Washington is looking for new sources of revenue to reduce the federal deficit. No matter how Congress acts, you still need to be cautious. Any uptick in interest rates, or market hiccups, could trigger losses, too.

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