TimingCube - Retirement investing, Part 2 - savings,retirement,inflation,fixed income,market moves,junk bonds

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Signal Update

Current Signal Performance as of

Signal Type	Trade Date	Index	Return since issued
		Nasdaq 100
		Russell 2000
		S&P 500
		QQQQ

Cumulative Returns since First TimingCube Live Signal () as of

Index	Long Only	Long Only with Margin	Long & Short	Long & Short with Margin	Buy & Hold
Nasdaq 100
Russell 2000
S&P 500
QQQQ

Note: QQQQ returns are included for continuity sake.

Market Update

After a good start on Monday, major indices retreated the next four days to finish the week lower. The market appears to be driven by external factors, not by fundamentals. This is illustrated by what happened Friday: despite a better-than-expected mid-quarter update from Intel that should have helped the market move higher, investors instead focused on the wider-than-expected trade deficit, rising bond yields and higher oil prices to send the averages lower. Such factors are keeping a lid on further stock gains for the time being, even though the economy is doing quite well. Despite its 1.80% weekly loss, the S&P 500 remains above its 50-day exponential moving average (EMA). The Russell 2000 shed 2.81% on the week to close just below its 50-day EMA. The best-performing index turned out to be the Nasdaq 100, which finished only 0.98% lower.

Our Model has acknowledged the week's negative action, but has yet to trigger a Sell signal. Our current Buy signal consequently remains active.

Trend Timing School

Retirement investing, Part 2

Last week's article "Retirement investment basics" discussed how to maximize your savings and retirement investing, but it did not address where, how and how much to invest. By coincidence, or sheer luck, these just happen to be today's topics.

When it comes down to deciding how much to invest we face a highly personal question that we all must answer for ourselves. As we wrote in the January 23, 2004 article on "Diversification options", we strongly believe in diversification as a primary risk management tool, and always recommend spreading our wealth across multiple types of asset, and investing in diverse instruments and indices. We also know that no investment system or strategy can be perfect all the time, including ours.

Putting aside such diversification matters and instead concentrating on the portion of assets we earmark for stock market investing following the TimingCube Model, we recommend investing the entire portion per the signals. This portion of our assets is not where we want to keep some cash available or hedge our bets. We want to maximize our returns and we do so by fully participating in all meaningful market moves, up or down. On the other hand, we oppose any strategies that expose our capital to major losses (such as those possible with Buy and Hold during a bear market), or investment vehicles that lag or barely keep up with inflation. Even during our retirement years, when we depend on withdrawals from our nest egg to pay for our living expenses, we do not favor the frequently recommended fixed income debt instruments such as bond funds because most struggle to beat real inflation, and the high yielding ones tend to be risky junk bonds. Instead we commit the entire portion to our all-weather Trend Timing approach to stand a better chance to continue growing our savings while generating the current income we need.

Our next task is to select how we follow the signals, which we do by choosing the combination of strategies and indices which suits our objectives and risk/reward personality. Typically this results in a blend of the 4 strategies and 3 primary indices, for example an 80% Long and Short and 20% Long and Short with Margin ratio applied evenly to the 3 indices. For non-retirement funds we can simply go long and short our preferred ETFs, with or without leverage. Not so for retirement plans. Because the tax code prohibits using funds in retirement plans as collateral to borrow money, we are effectively prevented from selling short or trading on margin in such accounts. Thus, when using the ETFs that are normally our core investment vehicles, we would be restricted to only using Strategy 1, Long Only. Since it consistently outperforms Buy and Hold over long periods, Long Only cannot be called a bad strategy. Yet many of us are seeking more aggressive returns and to that end we developed techniques with alternate investment vehicles which let us implement all 4 TimingCube strategies while complying with the tax code. The table below summarizes how each of the 4 strategies can be implemented with bull/bear index mutual funds such as those in the ProFunds and Rydex families, or with options.

Signal	Strategy	Bull/bear index mutual funds (see Note 1)	Options (see Note 2)
Buy	Long	Buy Fund	Buy call option contract (10 to 15% of money)
Buy	Long with Margin	Buy 2x Fund	Buy call option contract (20 to 30% of money)
Sell	Short	Buy inverse Fund	Buy put option contract (10 to 15% of money)
Sell	Short with Margin	Buy 2x inverse Fund	Buy put option contract (20 to 30% of money)

Note 1: To find the list of specific ProFunds and Rydex mutual funds to use in each strategy, please read the What to trade? section of the Resources page
Note 2: For details on option strategies please read the January 21, January 28, February 4, and February 11, 2005 Trend Timing School articles

The investment vehicles and transactions listed in the table assume your account is at a brokerage firm which offers such investment choices. Not all brokers allow option trading in retirement accounts and not all feature the ProFunds and Rydex fund families. Besides such individual broker restrictions, most retirement plans such as traditional and Roth IRAs which are most common, and a good number of self-employed SEP or Keogh plans are self-administered at a brokerage firm of your choice.

The situation gets more complicated with employer sponsored plans such as 401(k), 403(b) plans offered by public school systems and other tax-exempt organizations, or the many other varieties of pension plans featured by private employers or various branches of government. The increased difficulty comes from the fact that the plan typically carries a very short list of investment choices, which generally does not include bull/bear funds or options. Without these choices you will have to fall back on the Long Only strategy. If the investment vehicles you have access to are listed on public exchanges you should be able to verify how they would have performed using our signals via the "Performance by individual security or index" feature on the Results page. Frequently however, the funds in your retirement plan are not publicly listed and you are left to find which best approximates the index of your choice. The name and description of the funds generally give a good clue as to what index they track. For example, a "Small Cap Growth" fund is probably well correlated with the Russell 2000. Similarly, a "Large Cap Growth" fund most likely tracks the S&P 500.

Note that the restrictions with such employer-sponsored retirement plans only apply to plans at your current employer. Most plans of past employers can and should be rolled over into a rollover IRA account at the broker of your choice. You will then have the choices and flexibility you need to fully implement the strategies as shown in the table above. As a side benefit you might also enjoy consolidating those dusty accounts into fewer that you can actually manage.