No. of Recommendations: 2
I can’t keep track of the trains of thought I’m pursuing in my posts. So I don’t even try, much less worry about the fact that I might have argued a point in opposite directions. But somewhere in my travels, I suggested that PCY (rather than EMB) was the purer play on foreign sovereigns and that a partial explanation of why PCY was being bid up was its inverse relationship to the US dollar. In other words, to go long PCY was the same as shorting UUP. Well, things weren’t that simple, as doing rolling, 1-month correlations soon discovered. Sometimes, the two did move inversely. Sometimes, in lockstep. You can repeat the demo, but you needn’t, because a picture gives a better idea of what’s going on.;range=2y;c... From there, I wandered into currency funds generally, and ending up creating the following chart for DBV, which is a fund that goes short three of the G10 currencies (currently, EUR, JPY, CHF) and long three offsetting ones (currently, AUD, NZD, NOK).

Clearly, the trend is up, up, up. But the recent 4-day price gap above the Keltner Channel, paired with the Chaiken indicator (showing money flowing out of the fund), paired with CCI (suggesting an overbought condition) suggested DBV had become a short. Contradicting that suggestion, of course, was the strength of the upward trend (confirmed by the TSI indicator). "Was DBV a short, or not?", and was I sure enough of my analysis to bet money on it? My intention went I went to bed Sunday night was to put on the trade, at least in “sim-mode” (aka, paper-trade it). But I was wide awake in the early hours and too busy thinking to want to get out of bed in time for the opening. So I let the opportunity pass. And when I did get up, I went to work in the bond market instead. But the trade would have worked had I put it on.;range=1d;c... That prompted me to ask this question:

"Am I good, or am I good?" BRRRP! Wrong question. The right question is this. "Was the trade put on from a clear set of rules, such that, the trade could be repeated?" That's what I knew I lacked. If I had to bet, I'd say that I had read the chart correctly. DBV was a short. But what about the next chart, and the next chart, and the next? 'Process' is what matters, not getting a bet or two correct, and I knew I still had a lot of work to do toward developing a clear set of rules.

OK, DBV is a currency fund, not a bond fund. But the same considerations apply. Despite all the nonsense about mutual funds (and ETFs) being “a means to make long-term investments”, they really are nothing more than trading vehicles. And bond funds --especially -- are trading vehicles, because they have no maturity. When interest-rates rise, you’re going to suffer capital-losses. So you get into bond funds when the getting in is good, and you get out of bond funds when the getting out is good.

Your time-frames can be long, months or years. That’s not a problem, and that is the least of your worries. But you get in, and then you get out, and you are going to do so on signals that could be purely ‘fundamental’, but must also include ‘technical’ considerations as well. That means if you want to buy bond funds, you have to develop a market-timing system you can trust. Otherwise, you’re going to get killed and suffer the fate that the average fixed-income investor does, namely an 84% under-performance of your relevant benchmarks --and all due to your crappy timing-- as the Dalbar 20-year studies of investor behavior so clearly document.

So, what’s a workaround? Buy individual bonds and hold them to maturity. That tactic sidesteps the whole timing problem.

Dalbar’s results are reported in QAIB Advisors Edition 2012 as a freely downloadable PDF file found through any search engine.
Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.