TimingCube - Concentration of force - Portfolio,Asset Allocation,diversification

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Cartoon of the Week

Current Signal Performance

Turbo Signal	Trade Date	Turbo Model Returns (Long & Short Strategy)
			Nasdaq 100 (QQQ)	Russell 2000 (IWM)	S&P 500 (SPY)

Classic Signal	Trade Date	Classic Model Returns (Long & Short Strategy)
		World	Nasdaq 100 (QQQ)	Russell 2000 (IWM)	S&P 500 (SPY)

Market Update

Stocks continued to advance over the five-day span, allowing the Nasdaq Composite to finish at its highest weekly close since December 2000. After a quiet Easter Monday session that left them little changed, the main indexes rallied in earnest on heavy trade Tuesday. The strong action lifted the S&P 500 past its June 2008 high and also triggered a new Buy signal for our Classic Model. As had been widely anticipated, the Federal Reserve announced Wednesday that it is leaving interest rates unchanged, therefore sticking to its accommodative stance. The news helped stocks rise again, with the Nasdaq Composite finishing the day 0.8% higher. Despite early weakness, the major averages were able to reverse course and notch additional gains Thursday. On the economic front, GDP data showed that the economy grew by 1.8% in the first quarter while March pending home sales jumped 5%, largely above expectations. A strong earnings report from Dow Component Caterpillar allowed stocks to cap the week and month with another winning session Friday, pushing the S&P 500 higher for the fourth consecutive day.

For the week, the Russell 2000 (IWM), S&P 500 (SPY) and Nasdaq 100 (QQQ) respectively gained 2.30%, 1.98% and 1.27%. All three ETFs are located above both their 50-day and 200-day exponential moving averages (EMAs).

For its part, our World portfolio bested its U.S. counterparts with a 3.19% gain over the five-day span. The portfolio consists of the 5 top-ranked world ETFs as of April 21, which marked the beginning of the current 4-week holding period.

Both our Classic and Turbo Models are now on Buy signals.

Trend Timing School

Concentration of force

A critical aspect of investing is portfolio allocation. Our portfolio is simply the group of all our assets, and a sad reality is that most of us never consciously think about and select the asset allocation that makes the most sense for us. As life happens we somehow end up with a collection of assets, and the mix is most likely not optimal.

For example, few people ever make the conscious decision of investing 20%, 30% or more of their assets (together with more borrowed money) in real estate. Yet that is exactly what most home owners do. Yes, we all need a place to live, but in certain areas and during certain periods, real estate can be a lousy investment. Many of us, after a heavy down payment and mortgage payments, feel that after all these years this money invested in the stock market would have grown to much more than the price of our home. On the other hand there are also many who have refinanced their homes (with subprime loans for some of them!) and taken out their equity to spend it on SUVs and other ephemeral goods, and who will probably soon regret not having kept that "real estate allocation". But we digress.

Before getting into allocation proper it might be useful to ask why we need asset diversification in the first place. Simply put, diversification is the key ingredient in any risk management strategy, and we have been taught not to place all our eggs in one basket. The idea behind asset diversification is that non correlated asset classes do not go through market cycles together and that the losses in one class will be offset by gains in others, thus reducing overall portfolio risk.

Yes, by necessity we are all involved in asset allocation in order to best serve our specific circumstances and the need to satisfy different and sometimes conflicting objectives. For example, anyone of working age should save and set aside a safety buffer in cash or other liquid and readily accessible vehicle as contingency for a job loss. How much you set aside depends on numerous personal factors such as being single or providing for a family, years to retirement, your spending habits, how long a period of time you estimate could be required to find another job, etc. Other commonly accepted asset allocation strategies would be for someone in their younger earning years to assign a large percentage of assets to equity investments for long term growth and a small fraction to fixed income, versus a retiree who would reverse that distribution to maximize income generation and limit risk. This type of asset allocation is justified and is a must for everyone.

The amount of wealth we have can also dictate or at least curtail our allocation strategy choices. For example a retiree with just enough money to generate the income necessary for living cannot take any risks and is forced to assign everything to income generating investments. A wealthier retiree with a bigger cushion is likely to be more aggressive with his/her investments, be allocated more heavily into stocks and be willing to accept the associated risks to their capital. Wealthier investors are also more likely to allocate a portion of their portfolio to other asset classes such as collectibles (fine arts, jewelry, etc.), commodities, and precious metals.

The aspect of asset allocation we generally take exception to is the part that relates to the moneys we have left after the safety net, the income generation requirements and other necessities have been taken care of. It is how we allocate the money we are ready to put to work on our long term wealth building endeavors. For that portion of their portfolio, buy and hold investors use asset allocation as a risk management technique. Diversification has always been a vital corollary of buy and hold investment strategies. The theory is that by holding on to stocks through thick and thin you need to reduce how much of your portfolio is exposed to that downside risk. You place the balance in other assets such as income generating investments which help offset losses in equities during downturns and bear markets.

This view has permeated much of the financial industry. A good example of this is found in the numerous "asset allocation calculators" or other "portfolio management tools" available from various sources. Their questionnaires require personal information such as age, risk tolerance, investing experience, etc. The output invariably includes a pie chart with colored slices proportional to the percentage allocated to each asset class. If you use your broker's tools the asset classes are likely to be restricted to investments they offer, and typically includes:

Large cap equities
Small cap equities
International equities
Fixed income
Cash or equivalent

The flip side of such diversification and traditional asset allocation is that while it softens the effects of losses in some asset classes, it also averages down your portfolio's return. The returns of the best performing assets are guaranteed to be watered down by the others. As Trend Timers we do not see how taking a position in bonds, for example, is proper protection against a severe correction or bear market. Yes, we always recommend against non-diversified investments, single country or currency approaches, but we first and foremost do not recommend holding a long equity position through a severe downturn.

This is why we have always preferred our asset allocation dynamic and strategic rather than static. With our Classic and/or Turbo Models, We are invested in stocks during meaningful uptrends, and not invested in stocks (or short the stock market) during the larger corrections and bear markets. In addition, the World ETF Ranking pinpoints the markets with the strongest momentum and the most likely to outperform. Thanks to these directional and targeting indicators, however imperfect, we can lean towards the "concentration of force" principle instead of averaging down with fixed asset allocations.

FAQ of the Week

Question: Can I get the current Classic and Turbo Signals over the phone?

Absolutely! Many of us spend at least some time during the year traveling or otherwise away from reliable e-mail or Internet service, yet needing to stay in touch with the signal without interruption. Some of our newest subscribers may not have discovered the various methods of accessing the current Classic and Turbo Signals via phone, and we will remedy this perilous situation right now.

Depending on the type of phone you have access to, there are three methods to get the signals:

Call our "Signal by Phone" service from any phone anywhere. You can find the access number and your individual access code on the "My Profile" page after you log in. Make sure to carry these number with you when you anticipate being unable to go online. The "Signal by Phone" message is updated daily, at the same time as the Web site, after the markets close by 7:00 pm ET.
If your cell phone can receive e-mails, set that e-mail address as your alternate e-mail address on the "My Profile" page to receive our notification e-mails wherever you are.
Finally, if you own a SmartPhone, you can use it to browse a special secure "Current Signals" page. Just enter the https://www.timingcube.com/app/html?page=pda_login URL into your SmartPhone's browser and log in to access the information.