How Risky is a WEIMERandWIRTH portfolio?

How much should a True Believer invest in a WEIMERandWIRTH portfolio?

What are the best alternatives to a WEIMERandWIRTH portfolio?

I am having a difficult time determining a reasonable and proper amount to allocate to GroMo investing. This appears to be a common problem. One of our members wrote: Logic would say to put all my stock capital into GroMo, but I am reluctant to do that. I too am reluctant to do that even though the return of my GroMo portfolio was more than three times the return of my remaining stock portfolio over the last five years. The BIG question is: How risky is GroMo investing relative to the market?

The primary reason I invested my money in Growth and Momentum stocks was that during the correction that began in 2000, the WEIMERandWIRTH system produced positive results while everything else was crashing. Will it always work that well? Only "The Shadow" knows but just because WEIMERandWIRTH weathered one nasty correction does NOT mean it will handle the NEXT correction as well. My advice is to be emotionally AND financially prepared for a nasty 50% correction at all times i.e., make plans for a disaster; if you do then you may be able to survive and recover.

How risky is WEIMERandWIRTH relative to the S&P 500, or anything else? There are many ways of quantifying risk, but I am fond of saying that one will never know how risky anything is until it’s much too late to do anything about it. The most popular methods of quantifying financial risk measure the volatility of a portfolio. If volatility occurs while the market and the portfolio are rising then most investors will claim they are in this game for the “long term” (whatever that means).

When the market starts testing new bottoms it’s a different story. That’s when everyone starts to head for the exits. So, the questions that are really begging for answers are: How risky is a strategy when the market is falling? And, more importantly, how much of a loss can YOU tolerate before you start heading for the exits? With those thoughts in mind, here’s my method of quantifying downside risk. If anyone has a better method of quantifying DOWNSIDE risk than the method shown below then I would enjoy hearing from you.

These thoughts were written during June 2006, after the market had suffered a modest correction. On June 13, 2006 the S&P 500 was down 7.47% from its YTD high and WEIMERandWIRTH was down 12.34% from its YTD high. That makes WEIMERandWIRTH 1.65 times MORE risky than the S&P 500 during a MODEST correction. Note that a modest correction is defined as a ten percent drop and note that the S&P 500 has NOT suffered a modest correction YTD. Is the risk worth the reward? So far it should be a no brainer i.e., WEIMERandWIRTH is UP 15.4% YTD, the S&P 500 is UP 1.1% YTD, and WEIMERandWIRTH theory assumes the new picks will out-perform the market on the way up. But let's hope we don't suffer an immodest correction anytime soon because there have been some hints that WEIMERandWIRTH risk increases exponentially relative to market corrections.

I asked for some feedback from our subscribers regarding the portions of their portfolios they allocate to Growth and Momentum investing. About 25% of our subscribers responded to my request. The subscriber with the greatest allocation had 66% assigned to Growth and Momentum investing. Three beginners had less than 5% of their assets allocated to GroMo investing. Based on the responses to date AND based on my incomplete subscriber knowledge base, my best guess is that about ten percent of our subscribers are buying all or most of the recommended stocks, but I could be wrong.

What are the best alternatives to a WEIMERandWirth Portfolio?

Stock investing is risky business. So, what can you do to protect yourself? Dick Cheney put about 25% of his impressive hundred million dollar portfolio into international bonds, including many French Government Bonds. Keep your eye on Dick. Another thing you can do is prepare for the worst. I would say the worst is a Weimar Republic type of meltdown. I don't believe it's gonna happen, but we're gonna have to be careful not to tempt fate with too much more "patriotism". If it does happen then there's not too much you'll be able to do to protect yourself this time around, so don't spend too much time worrying about it.

Regardless, what are the implications for WEIMERandWIRTH? If we can avoid a global economic meltdown and if we can avoid a global nuclear holocaust then I would guess (and that's all anyone can do) that the prospects for WEIMERandWIRTH are as good for the future as they have been for the last five years. I'm basing that on the fact that WEIMERandWIRTH did well during the adverse conditions of the last five years and did EXTREMELY well during the good times, especially during any recovery. I'm also basing my belief on the fact that currently the global economy and the US economy are fundamentally reasonably sound i.e., that is NOT the way things were in 2000. Just remember: Stock investing is risky business and the markets require "a pause that refreshes" occasionally.

I wrote that Dick Cheney put about 25% of his impressive hundred million dollar portfolio into international bonds, including many French Government Bonds. How good a move is this likely to be? International bonds are currently primarily Euro denominated bonds. Four and a half years ago a US dollar would have purchased 1.12 Euros. That means the US Dollar lost close to one third of its value during the last four and a half years. It also means that international bonds were an incredibly good investment four and a half years ago - almost twice as good as US bonds. At this point in time, almost everyone agrees that the US Dollar is gonna fall some more relative to every major and minor world currency. Will it? We'll have to wait a while for the answer to that one, but what usually happens when everyone agrees on a future economic event? Maybe Dick knows something the rest of us don't know, but the record shows he is no more prescient than the average voter.

Should international bonds be in your portfolio?

Here is some return data:

All returns are TOTAL RETURNS for the FIVE YEAR period ending June 30, 2006

Vanguard Intermediate Term US Bond Fund (ticker VBIIX) 26.8%
T. Rowe Price International Bond Fund (ticker RPIBX) 57.3%
WEIMERandWIRTH 403.3%

How risky are international bonds?

The Vanguard Intermediate Term Bond Fund (ticker VBIIX) returned 83.7% over the TEN-YEARS ending June 30, 2006. The T. Rowe Price International Bond Fund (ticker RPIBX) returned 57.6% over the same ten-year period, meaning it returned almost nothing for the five-year period ending June 30, 2001.

Most folks buy bonds for income AND they buy them to reduce the risk of a portfolio. I have rejected international bonds for my personal portfolio because they generally do NOT provide income equivalent to US bonds, they are considerably more risky than US bonds, and the expenses are much, much higher than US bonds.

Should you buy individual bonds or should you buy a bond fund?

I have done considerable work in this area and I cannot think of a good reason to buy individual bonds instead of a well-managed bond fund with ultra low expenses. If you know of a good reason to buy individual bonds then please share it with me.

Individual bonds present a host of challenges for the do-it-yourself investor. First of all, buying individual bonds can be expensive. With very few exceptions, bonds are not listed on an exchange. To trade, you must get quotes and execute orders through a broker.

The initial investment in a bond fund, on the other hand, is typically much smaller than purchasing an individual issue, but with that lower price of admission actually comes greater diversity. A bond fund, which typically holds hundreds of different issues with different maturities, will inevitably offer greater protection against non-payment of interest and outright default than most individual investors could achieve on their own.

In addition to the advantage of diversity, open-ended bond mutual funds also have greater liquidity than individual issues. Redeeming shares in a bond fund is much easier than selling an individual bond. And investors who do not need cash flow benefit from bond funds because dividends are reinvested automatically.

Should you buy short, intermediate, or long-term bonds?

A great deal has been written about this and almost everyone knows that bond fund prices fall when interest rates rise and almost everyone knows that the price volatility is proportional to the duration of the bond fund. What many folks don’t know, including some very savvy investors I have known, is that the yield will also increase as interest rates rise (albeit, slowly) because, after the lower yielding bonds mature, they will be replaced with higher yielding bonds. That means that you can safely buy a bond fund if you are satisfied with the current yield because there IS NO DANGER OF PRINCIPAL LOSS unless you are forced to sell at an inopportune time. It may take a while to fully digest the preceding statement. Go to the URL directly below for a comprehensive explanation.

http://www.investopedia.com/articles/mutualfund/05/062805.asp

Should junk, or hi-yield bonds be in your portfolio?

Most successful investors practice some form of risk management. An easy way to manage risk is to allocate assets to both stocks and bonds because nobody knows if stocks or bonds are going to out-perform in the near or far future. If stocks go down then prudent investors buy more and vice versa. The problem is that you need money to buy anything. If stocks go down and if you hold a bond fund, then you can sell some of the shares of the bond fund to buy more stocks. So the first question is: What would you rather hold during a decline: junk bonds or hi-quality bonds?

During a decline, the supply of money available to business is going to increase because corporations are reluctant to borrow money. Intermediate and long-term interest rates are generally going to fall as a response to the increased money supply. The Fed generally helps by reducing short-term rates to encourage this virtuous cycle. That means, all other things being equal, the principal value of a bond fund is going to rise. But all other things are not equal because many bonds are going to default during a decline. Most of the defaulting bonds are going to be junk, so the principal value of a junk bond fund is going to be compromised much more than the principal value of a hi-quality bond fund e.g., from the TOP of the latest cycle on 3/31/00 to the bottom on 3/31/03, the Vanguard Intermediate Term Bond Index Fund returned 35.9% vs. 9.9% for Vanguard High Yield (Junk) Bonds. That means you do NOT want to own junk during a decline.

What about the growth phase? During a growth period interest rates are going to rise because corporations want to borrow money to expand. That means the PRINCIPAL value of ANY bond fund is going to tend to decline. That’s good, because a prudent investor will be selling stock during this phase because stocks will have risen in price. So, what should you, as a prudent investor, buy? If you buy junk, and if the economy stays healthy, then stocks will almost certainly out-perform junk. If the economy declines, then hi-quality bonds will almost certainly out-perform junk. Hmm, I wonder why it’s called junk? Write to me if you want a spreadsheet that shows the gory details of the current cycle. Next: Foreign stock. To be continued…

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