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Guest Post: Rebalancing Act For Your Portfolio
Submitted by David Galland of Casey Research
Rebalancing Act for Your Portfolio
Has the latest pullback in precious metals and related stocks given you a sickening feeling in the pit of your stomach?
If so, then consider rebalancing – because that sinking feeling is a good signal that you are probably overinvested in the sector. I’ll have more on that topic in a moment, but first to the question of where to invest, if not in precious metals and resource stocks? That is a question we get quite often.
For the time being, as least for those without international obligations, the carrying cost of cash is very low. Thus you can reduce your near-term risks, albeit at the cost of forgoing upside. If at one end of your portfolio “barbell” you have a 20% to 33% allocation to precious metals, having the same sort of allocation to cash on the other end of the barbell brings overall risk down while giving you the liquidity to act as additional opportunities arise.
As for the “middle,” consider building a portfolio diversified between undervalued food and energy stocks (constant needs) and high-potential tech stocks.
I include the latter because tech is one of the few remaining sectors where U.S. companies still have an edge. Secondly, the infusion of money from QE2, QE3, and so on will almost certainly have a positive effect on the broader U.S. stock market. While not a direct correlation to the situation today, as you can see in the chart just below, Japan’s predecessor experiment in quantitative easing clearly produced a dead-cat bounce in that country’s stock market. As you can also see, almost immediately after pulling the plug on the QE, the stock market fell back to depressed, pre-QE levels.
The importance of this information is two-fold:
1. It suggests that as long as the government keeps a heavy foot on the money-printing pedals, the U.S. stock market should, if nothing else, maintain. While we will almost certainly see a lot of volatility and perhaps sector-specific crashes – for instance financials, once the scale of the toxic loans becomes more visible – the broader market should be able to avoid a crash. Of course, once the plug is ultimately pulled on the Fed’s monetary madness, as it inevitably will be, then watch out below. But based on Bernanke’s latest comments, that appears anything but imminent.
2. With the risks of a broad market meltdown greatly diminished, investors – large and small – will be less afraid of piling into specific sectors that they feel have significant upside. That will feed into a bubble in the mining shares and drive up other sectors, including tech stocks. The world loves the latest and greatest, and the stories of the big tech winners are just so damn juicy that they regularly make news in all the right ways.
I recommend this because we continue to receive a large volume of emails from readers sitting on big profits in the precious metals and related stocks. They love what the stocks have done to their portfolios, but the size of their gains leave them nervous about a big correction, or worse. Offsetting those concerns is the clear upside in the sector (at least clear to us) – gains yet to come as currency regime change unfolds and the fiat currencies are eventually replaced with something far more tangible.
The precious metals stocks are going to have a particularly wild ride in the months and years ahead. While the overarching trend will be akin to a moon shot, there will be any number of heart-stopping corrections along the way. And looking at the current price action, we may be on the verge of one now.
Depending on your personal investment style, there are a couple of simple approaches you might want to take to that end of the barbell you have dedicated to the precious metals.
1. Trade the markets. Buy on our recommendations, but sell on big surges – for instance, of the sort we have seen of late. Wait for the next correction to reload and do it all over again. Of course, this gives rise to the possibility of missing a really, really big move. Which brings up…
2. Know what you own, and hang in there… at least until a hard exit target is met. I personally have owned several holdings for years. Not because I view them as heirlooms, but because they keep surmounting each successive hurdle on the way to production or, more likely, a buyout. During corrections, as often as not, I just buy more.
3. Use trailing stops. Because these stocks are very volatile, though, you are probably going to want to be fairly generous in where you set your stops… 15%, 20%? Otherwise, you could get knocked out at the wrong time, for the wrong reason, and miss the quick bounce. Also, it’s important to remember that the juniors are especially thinly traded. That’s important, because if your trailing stop is hit, your shares will be sold “at the market”… in other words, for whatever someone is willing to actually pay for them. Thus, on a really bad day, your stop limit could be triggered… but your stocks find no bid and plummet, eventually changing hands far below your limit.
(If you work with a good broker, rather than putting your order into the system to be blindly sold at the market if your stop is hit, they’ll agree to keep it “on the desk.” Which means that if your trailing stop is hit, they’ll actively begin trying to work your stock into the market for the best possible price, as opposed to blindly dumping the entire position at the bid, wherever that might be.)
4. Sell puts. If there is a stock you like and would like to own more of, consider selling puts – which contractually obliges you to buy a certain stock at a certain price, if it hits that price. In exchange, you receive a commission. As long as the stock is moving up, sideways, or even a bit down, you are off the hook, having earned a nice commission for your guarantee. On the other hand, if the stock falls to the point that it gets put to you, then you’ll be forced to buy it, but at a cheaper price than the current market – with your net cost lowered further by the commission you received. Again, however, in a freefall, you could be forced to buy more of a stock at a price that is well over the then-current market.
Those are just the broad strokes, and there are of course additional strategies you can use to mitigate risk while continuing to seek the explosive upside of the sector. But, again, I have to say that no matter what strategies you deploy, the only way to keep a cool head in the face of potentially extreme volatility will be to invest only with money you can afford to lose at least half of. Overinvesting in the sector will make you far more prone to panic and bad decision making.
And if you have enough of an allocation to the precious metals and enough cash, then you can look for other sectors with big upside and with a downside risk that can (mostly) be managed with thorough due diligence and in-depth industry knowledge.
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Trailing Stops are for suckers. Big moves are preceded by a drop to stop out the suckers.
Mr. Liquor:
You got that right!
The "Market-Makers" {Mafia Brokers} see both sides {hell... they have all the info in-house} and know exactly where and when to time the 'Fix': either up of down. Most "retail traders" {suckers} put in 5-10% "stops" and get taken out 95% of the time.
Watched exactly this happen in FX every day/night about 5 years ago... time after time. I finally did not use stops any more. Just made very 'small', % of acct., 'bets' and let it ride. Luckily hit a couple of massive JPY/USD moves. Got back to having made a small profit in my acct. and I got out of that rigged casino.
Get the hell out of the totally rigged nonsense just buy some bullion and small explores/miners and sleep well at night.
Two years of pain to just break even.
But it certainly showed what was up in the "global free market" after sweating out an almost complete slow bleed down of my FX acct. by the bastards.
..................................................................
Used to subscribe to Doug Casey and his newsletters years back... learned how to spell 'pump and dump' there.
Galland makes a perfectly reasonable case.
I am underweighted PMs at 8% (according to him), but if I can get JonNadler and his crew to bash gold down some more, I can re-balance my PMs up when I get back to the USSA in a few days. Appreciate it in advance guys, thanks.
Drop in price
leads to
Recognition of over investment
leads to
Selling
leads to
Further drops in price, further recognitions, etc. Rinse, repeat. Lots of air under here.
I Like gold, but pretending you can ignore market dynamics in an asset, because it is 'special', is a bad idea.
you really need to look at a long term chart of gold
it would be more accurate to say:
rise in price
fear of losing the value
leads to
supply
leads to
ownership in stronger hands
leads to higher prices
which leads to more supply
which leads to gold going into the hands of where it belongs
gold doesn't rest well in foolish hands
the single biggest market dynamic that is least understood is the simple golden rule: he who has the gold, rules
(i mean absolutely no offense .. you can read my statement as though i mumble to get the true emotion behind it)
The key is patience my friends. These BS moves are really so transparent; I really care less if the whole CFTC is caught sucking Jamie or eating Blythe. The Asians will rectify the whole scheme. Patience, Patience.
No doubt tons of stops were tripped up on the PM market.
The key to playing that market is to sell all power spike rallies, then sit and wait, then buy with both hands once there is a "technical breakdown" on the charts.
Works every time, the only time it didn't is during the 2008 meltdown.
So you are saying that those who bought silver at $9.00 or $10.00 (even with the inflated premiums prevailing at the time) in late 2008 did NOT have it "work" for them? Can you explain that please? Maybe I am ignorant about the fine art of trading, but tripling my money in barely two years "works" for me just fine.
I'm 100% diversified into Apple stock. That's plenty balanced for me. I'll retire when Apple hits 400 Quadrillion per share.
akak!
Robot is a trader. We are not. We are wealth preservers.
Yes, I too am really happy with my physical going up over the past several years. But, I wouldn´t mind if ´they´bash gold down some more in the next few days, I am not back in the USA for a few days.
So in other words, the key to making money in the market is to buy low, and sell high?
Damn, I never thought of that. It sounds awfully complicated, though --- can you please summarize that strategy for us?
no volatility in physical .. weight stays the same
it's easy to argue about paper trading, but almost no one could argue the foolishness of having too much physical gold
it would be like like saying that because of the volatility in oil, only a fool would have too many oil wells
On the other hand, if the stock falls to the point that it gets put to you, then you’ll be forced to buy it, but at a cheaper price than the current market – with your net cost lowered further by the commission you received.
This is completely wrong.
Selling calls is an obligation to sell at the strike price.
Selling puts is an obligation to buy at the strike price.
When you sell puts, you are on the hook for buying the stock at the strike price. When a put is exercised, with almost complete certainty the strike price is substantially greater than the prevailing market price at the time of exercise.
he meant out of the money puts which is why he said if the stock falls
he adds the caveat, " however, in a freefall, you could be forced to buy more of a stock at a price that is well over the then-current market."
for instance, if yesterday i was willing to buy slv at 27, i could have sold 10 put contracts for like $100 and if it fell below 27 it would get put to me at a price i would have been willing to buy it anyway. it's an alternate to putting in a limit order to buy 1000 slv at 27 which ties up capital anyway, so might as well get something for it instead. although it would only amount to less than 0.4%, it expires tomorrow
it works best if my preference would have been for it to get put to me anyway
Just buy the fucking dips.
I "trade" GDX. Over the past 2 years I have traded well over $2.5 million worth of shares along with at least 200 options either as spreads or covered calls.
There are 2 ways to play GDX
1) 50% of your desired exposure with a short dated covered call near or at the money (compute the premium+strike, it should be 2.5 to 3% upside for 30 days)The other 50% of your desired exposure with a long dated out of the money strike (6-12 months) with a 30-40% upside. When/if your shares are called at the lower strike reenter a similar position. Once your long dated short call is at ~50% of the value, cover it.
2) Buy long dated call spreads: for example today I opened the following position
Bought 5 Jan 12 55 strike calls
Sold 5 Jan 12 65 strike calls
Net cost of 4.40 per contract, GDX was trading at 59.80 at the time. My breakeven is 59.40. If the market moves against me I may close out the 65s and wait. Or I just might sit, all depends.
Imagine now that you have spreads like this for 6 expiration dates into the future. It is a nice way to play the game. I know that I wont hit homeruns, but I ain't trying to. I trade my own nut, I want steady "income" and moderate volatility. My risk is very well defined.
Seriously, I am concerned that mining stock ETFs, and the hot money going in and out will raise havoc with the tiny mining sector and will be a detriment to stability and capital formation. On the other hand this may create some great buying ops for those funds and investors who know the sector and the companies.
It already has....
IPT.TO at $0.22 now 1.60
FRG at $2.46 now $11
AVR.TO at 0.65 now 1.52
I worry more about GDXJ than GDX in that regard...