Definition of Liquidity

  • Thread starter Gene E. Utterback, EA, RFC, ABA
  • Start date

G

Gene E. Utterback, EA, RFC, ABA

Liquidity = when you look at your brokerage statement and wet your pants!

Gene E. Utterback, EA, RFC, ABA
(Hopefully our esteemed moderator will allow a little humor onto the board)
 
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D

dumbstruck

Liquidity = when you look at your brokerage statement and wet your pants!
I think that visceral reaction can be a valuable tool for fine tuning
asset allocation, once you separate out one painful issue. One must
abandon the "anchoring" tendancy, to wistfully cling to the way things
were. Don't be like the house seller who even in better times sticks
with an overvalued price out of sentiment and slowly bleeds for a year
of lost opportunity.

Accept that a financial battle was lost, and today is the start of the
next battle which you can expect to win (at least relative to your
current realistic position). Tune your financial allocation so that
the swings of fear and greed are about balanced as the rallies and
dips proceed. Even the unfair dips, like my tiny allocation into
equities recently were mauled by the political scares put into
preferred and health stocks (I failed to learn from a similar Clinton
experience).

Anyway I don't see why I've been criticized on this forum during early
parts of this crash for advocating incremental sell downs. Shame on me
for spending multiple (single digit) brokerage fees in the sell down
and the future ramp up, some said. And would I please take this
discussion of gingerly dipping into bonds off the forum, SHE said. Now
I have preserved more liquid asset firepower, and do think and feel
myself in a comfortable asset allocation.

Similarly in the early 2000's crash (under a different username) I was
castigated on this forum for switching to fringe asset classes that
were actually working, like certain long-short funds or certain
financial sectors. And pre-internet, folks thought me nuts for
immediately pouring money into stocks in the crash of 87.

I may be an idiot in 97% of aspects of financial planning (and truely
appreciate the generous advice and brainstorming provided here), but I
can't accept the party line on asset allocation and have thrived by
defying it. The Vanguard/Bogle platitudes on slow and steady course
with a backing of umpteen statistics seemed so plausible, but then
seemed obviously in denial of the emotional rollercoaster of reality.

It was clear to me that if you felt the energy of volatility, you
could harness it rather than just withstand it. No, this is not
stepping into any frantic trading mode but simply reacting to the
tides of history with strategic shifts. It does help to watch how
various sectors of assets are doing and why at least weekly ("The
Economist" magazine has been my bible on macro-currents of finance and
world events for decades).

And charting trends are very valuable - I think the last 25 years are
quite instructive, as in a slightly cartoonish version:
http://finance.yahoo.com/q/bc?t=my&s=^IXIC&l=off&z=l&q=l&c=^n225,^mid&c=^DJI
Unfortunately it doesn't reflect dividends, but suggests about the
only sector you might have wished to buy and hold were midcaps. My
formative stage was in the mid 80's where I held the Nikkei225 during
that fabulous upslope. Note 1987 crash which was proportionately far
less in Japan, so I judged it not the end of the world but a big
buying opportunity which was quite right.

And mainly by luck I bailed out of Japan before the mother of all
horrifying and everlasting crashes happened. This prepared me for
handling the tech and later financial crashes. The tech crash was not
that scary because there damage wasn't so total... there were seeds of
survival in corners of the equity market. The financial crash seems
more scary with respect to stockHOLDers because the destruction is so
widespread.

So I say listen and respond to what your emotions tell you, as long as
they are informed and not just knee jerk. Something seems missing from
the financial planning cold logic that I have been exposed to; I don't
think conservative holdings with overanalyzed p/e ratios are the
answer. In my personal experience I managed my retirement account in a
more traditional conservative way and it fell behind. Also I was
appointed trustee of some relatives estates, and also saw how backward
looking conservatism had driven hard won assets into decline. "Watch/
think AND feel/react" is my investing motto.
 
D

dapperdobbs

On Mar 4, 10:13 am, "Gene E. Utterback, EA, RFC, ABA"
With due respect for the OP's humor, but not necessarily chuckles
over the declines ...
Accept that a financial battle was lost, and today is the start of the
next battle which you can expect to win (at least relative to your
current realistic position).
Would you say a bit more about what you recommend? Ideally with some
analysis showing why? I gather that principally you are saying stocks
will not bring about a positive return over the next decade, so one
should move to cash and prepare to trade. Are you saying "buy and hold
is dead"?
Anyway I don't see why I've been criticized on this forum
I'm not criticizing you. I don't believe I have previously. Generally,
one can expect that when one is right, but not in agreement with the
majority, one may be hacked to death. It's an interesting phenomenon.
 
A

Alvin

dapperdobbs said:
Would you say a bit more about what you recommend? Ideally with some
analysis showing why? I gather that principally you are saying stocks
will not bring about a positive return over the next decade, so one
should move to cash and prepare to trade. Are you saying "buy and hold
is dead"?
I'm not the OP but I think stocks may take a decade to get to their old
highs. Obviously, that's just a guess.

The best performing ETF's for some time now have been the 2X and 3X short
funds. I know these aren't for everyone but they have been working. Myself,
mostly in cash and bonds (GNMA), but I have some play money.

Example, if you bought 2,000 shares of RFN on Jan 9 at 36.75 ($73,500 + $7)
it would be worth $165,980 now. A profit of $92,480. A gain of 125.82%. I
still have some RSW but I'm feeling now may be the time to sell that too. I
fear a bear market rally is near and these can be impressive.
 
R

Ron Peterson

Liquidity = when you look at your brokerage statement and wet your pants!
Good one. :)

Of course, liquidity is being able to convert one's assets to cash.

Cash has the greatest liquidity followed by checking accounts, stocks,
and real estate.

Tradable securities have lower liquidity when they have a low trading
volume and an accompanying bid ask spread.
 
H

honda.lioness

dumbstruck said:
And would I please take this
discussion of gingerly dipping into bonds off the forum
? To what kind of bonds were you referring in this past discussion?
Please cite the thread, because many of the regulars, myself included,
and professionals elsewhere think allocating more and more to
investment grade bonds as one ages is an appropriate strategy.

I got a kick out of Joetaxpayer's elderly client raving about what a
great financial advisor for advising her to do what is, IMO, good ol'
conventional wisdom: If you're in your 80s, better have a huge chunk
in CDs, high grade investment bonds, etc.

Just to repeat what I think should be a mantra here.
 
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T

Tad Borek

Alvin said:
The best performing ETF's for some time now have been the 2X and 3X short
funds. I know these aren't for everyone but they have been working. Myself,
mostly in cash and bonds (GNMA), but I have some play money.

Example, if you bought 2,000 shares of RFN on Jan 9 at 36.75 ($73,500 + $7)
it would be worth $165,980 now. A profit of $92,480. A gain of 125.82%. I
still have some RSW but I'm feeling now may be the time to sell that too. I
fear a bear market rally is near and these can be impressive.

My latest blood sport is skewering leveraged ETFs of all types and this
is a perfect opportunity. Setting aside the issue of whether one should
speculate about the short-term pricing of stocks using leverage, these
ETFs have another problem: they don't do what most people seem to think
they do.

RFN is an inverse 2X sector fund pegged to the stocks in the S&P
Financial Sector index. If those stocks drop (-5%), "inverse 2X" would
be +10%. Too many people assume that works over periods like a couple
weeks or months or even longer. But as it states in the prospectus, that
isn't the goal at all - the goal is 2X the DAILY returns of those stocks.

This is an enormous difference and the dates you listed give a perfect
example...January 9 to "right now":

S&P Financial Sector ETF (ticker XLF)
"long" ETF tracking this index
1/9: $11.56 close
3/12: $7.79 (intraday, delayed quote)
change: -32.6%
-2X change: +65.2%

Rydex Inverse 2X S&P Select Sector Financial ETF (ticker RFN)
2X inverse ETF tracking this index
1/9: $37.53
3/12: $46.31 (intraday, delayed quote)
change: +23.4%

So far 100% of people I've discussed leveraged ETFs with would expect
the returns of the ETF to be somewhere around 65%. But it's never that
way, if only because of [google:] variance drain, which bleeds money out
of a leveraged investment. 2X risk, without 2X returns. On top of that
are all sorts of slop from the ETF creation/redemption process, trading
spreads, and the way the money is actually invested. On one hand, people
could scream bloody murder about these mismatches, but on the other
hand, it's right there at the front of the ETF prospectus, fully
disclosed in black & white under "risk factors". But who reads
prospectuses? <sigh>

That issue aside, the volatility of these 2X sector funds is astounding
- nearly a 50% drop in just the past 4-5 trading days for the
financials. Easy come, easy go.

Don't get me started about UCO/USO - the regulators seem to be on that
one, finally.

-Tad
 
J

JoeTaxpayer

Tad said:
This is an enormous difference and the dates you listed give a perfect
example...January 9 to "right now":

S&P Financial Sector ETF (ticker XLF)
"long" ETF tracking this index
1/9: $11.56 close
3/12: $7.79 (intraday, delayed quote)
change: -32.6%
-2X change: +65.2%

Rydex Inverse 2X S&P Select Sector Financial ETF (ticker RFN)
2X inverse ETF tracking this index
1/9: $37.53
3/12: $46.31 (intraday, delayed quote)
change: +23.4%
The RFN hasn't been around a year yet, so I could only graph vs XLF for
6 months max. XLF down just over 50%, RFN also down, about 45% or so.
So, it would appear to be even worse than you suggest, wow.

www.blog.joetaxpayer.com
 
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J

JoeTaxpayer

Well, great minds often post here and days or weeks later, Forbes covers
the same story. In this case, Tad's (great mind) and Forbes' article
regarding ETF tracking error. An excerpt:

"For example, anyone buying and holding ProShares Ultrashort Financials
would have gained 4.3% in 2008, versus a decline of 50% for the Dow
Jones U.S. Financials Index. Since the fund seeks to double the opposite
of the Dow Jones Financials Index, many buy and hold investors presumed
they would instead have gained 100%. Sorry, Charlie, the devil is in the
details."

The full article at http://tinyurl.com/tadetf

Joe
 

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