A guest article

I got an e-mail the other day suggesting I publish a guest article. It was somewhat related to what Ray Lucia was talking about (see my Decemeber 22, 2010 post). Here it is.

How to manage your 401 k account to stay out of debt

The 401 k investment is the most common financial instrument for the US consumers to save for retirement. It is a type of tax-deferred investment that is offered to employees by their employers. If you’re working with an organization where your employer provides you with a retirement account, you must utilize it by contributing a part of your monthly income to it. If you’re not doing it, you’re perhaps making the biggest financial blunder. In future, if you incur credit cad debts, you can easily seek the help of your 401 k account instead of getting help from debt consolidation non profit companies. An employer may match an amount with your contribution to some extent. The entire investment to the 401 k account is tax deferred. Therefore, it is very important for you to take advantage of this tax deferred retirement benefits in order to stay out of debt. Have a look at the ways in which you can manage your 401k accounts.

• Sign up for 401 k account: As you join a company where you’ll get a retirement savings benefit, you must first sign up with that company. If you don’t sign up with your company’s benefits, you’ll perhaps lose the free money that you are supposed to get from the company as a matching aid.

• Contribute money to the fund: Once you sign up with the company’s retirement benefit plan, make sure that you contribute as much as you can so that your employer can easily match some more money. Up to 15% of your gross monthly salary can be contributed to this account and can be taken advantage of due to the tax benefits.

• Know how to access your account: Only creating an account will not do, you also need to access it. The money that you invest in the 401 k account will not be registered by your employer. An independent financial institution will supervise this account. Therefore, you need to know how you can access the details of that account, whether personally or online.

• Build your investment portfolio: Usually the investor of the 401 k account will offer you various mutual funds for investing your money. Make a comprehensive research of these funds and make sure you cleverly pick the funds that have a higher amount of return than the others. Also check the track records of the funds that you’re investing in. Try to keep both equity funds and bonds in your portfolio. As the investment in the 401 k is not subject to tax, this is a good place to invest in the high-yield bonds.

• Keep monitoring your investment account: If you have invested earlier, you must be aware that asset allocation is equally important to manage and build your portfolio. With time, readjust your portfolio in order to get better results.

Therefore, if you want to lead a debt free retired life, make sure you invest in the 401 k account that is bestowed to you by your employer. It is certainly better to seek help of your 401 k accounts than debt consolidation non profit companies during the time of an emergency.

Should we borrow from 401K?

Thought I do not share Ray's view on trading and investing in stocks, I am a big fan of him and respect him much for his work. Here is his recent radio show radio show (12.21.2010) where he talks about why borrowing from 401K can make sense for some people. Skip first 2 minutes and 25 seconds of a commercial and enjoy Ray.

VTINX is still a hold

I saw few visitors came to the blog via a google or yahoo search on VTINX.

I like Vanguard funds and this one in particular, but rising risk of a pullback in stocks combined with rising rates and hence falling bond prices should make investors watch closely and be prepared to reduce their position in the fund.

It usually invests about 65% in bonds, 30% in stocks, and 5% in money market. Our model seems to do its job just fine and says VTINX is still a hold as of now. Next reversal is 11.22.

Below is a chart (click to enlarge)

The table has been updated. Stocks continue up and bonds down.

Being hesitant executing a signal from any trading system is quite natural. One of the reasons is that no system is right 100% of the time and many wrong 50% of the time. Following our system and selling stocks in May looked good back then, but people who just held to their stock funds did better this time.

If that feels discouraging, look back a little further and see that those who did not sell in 2008 are still at a loss.

Not trying to outguess a system and following all signals takes discipline. 

Out of bonds

Bonds hit our stop last week and did not recover (see post dated Nov 16).

Heads up on bonds

$BNDUS we follow closed below our reversal point. If it does not recover by the end of the week we will have to sell bonds and wait for a new signal.

QE II explained

Important: parameters changed.

As a result of back testing I decided to change parameters for both SPY and Bonds from 2,7 to 3.5,7 and 2.3,6 respectively. I removed all the funds from the table as their parameters also need to be adjusted.

I left our old parameters in place in both charts and the table for the time being.

There is no change in signals for bonds, so we stay in. I have a sizable position in bonds in my 401K account as of today.

There is a difference in SPY. We bought SPY according to our 2,7 signal, so we should stay in. I suggest those who did not buy, stay in cash and wait for a signal with our new parameters.  Those who did, watch closely 122 area. If we get a buy signal from our new parameters then you stay in and switch to the new parameters at that time. If we do not get this signal soon that would mean SPY will likely pull back, so cash in the gain and wait for a signal on the new parameters.

Feel free to e-mail if there is a question.

Just came across a site I recommend everyone to check out

Seems like the author, Michael Hanton, also did not believe in "Mutual Funds will take care of themselves" approach and has done a very good job in developing a system that helps him and his readers to manage their retirement (and investment) money.

Here is a link: 401K Trend

Why is that so many BS articles

like this
http://www.ivillage.com/401k-how-actively-should-you-manage-it/7-a-219565

and not that much information on what it really takes to manage large amount that has been being saved for many years, sometimes three-four decades.

"The good news is that although you shouldn't ignore the account altogether, an annual checkup is really all you need. At that time, check that your investments are diversified according to your needs and goals. Diversification is the key to successful investment management".

Yea, right. One checks his account on December 31 of 2007, slightly adjust his allocation and happily celebrate New Year leaving his account alone until the next checkup at the end of 2008. Give me a break.

Interview with Welles Wilder

One of the reasons I want to mention this interview here is to draw your attention to what the author of the system we follow here (with a very slight modification) had to say about it:

"I think the Volatility System is the best, but most overlooked system in the New Concepts Book. In 1993, Futures Magazine did a study on trading systems, and declared then that the Volatility System was the best system up to that time".

Here is a link to the interview.

I do understand that this is not the best system available today, yet it is powerful enough and at the same time simple enough to become my prime candidate as a tool for managing 401K.

Buy signal on S&P

We did get a buy signal. That's been expected - see my previous post. Though it is a surprise for many including myself we have to execute. Yes, we may lose money as market seems to be overbought and due for a pullback, yet the worst thing to do would be trying to outguess the system. Rules are rules. We have to buy and be prepared to accept a loss if that is what we will end up with. Here is a chart.

Heads up on S&P

If SPY manages to close above 113.51 we will have to go long. Here is a chart (click to enlarge):

Note that the indicator is drawn with our "standard" parameters (2,7) and not with "optimum" parameters. I still have not came up with an optimization algorithm that I'd like. Working on that. All I can say is that it will  make our stops wider like on the chart below:

An article from wikiHow

Though a "recipe" this article provides is quite vague and even naive to some extent, the idea of being in equities when they move up and staying in stable value options (money market) when they go down is what we preach, research and implement.

I am planning to return to this article and show that the approach suggested is better than doing nothing and that the ATR stop based system we follow is better.

Here is a link: How to Manage Your 401k Investments and Choose Your Funds

Back-testing and optimization

All investment plans, methods, systems and parameters of those systems need to be constantly evaluated and adjusted.

Ideally, evaluating of a system would include all of the following steps:

1. Back-testing (using in sample and out of sample historical data)

2. Paper trading (forward testing)

3. Live trading

Today I am reporting some results of back-testing I've done. Here is what my favorite source of definitions - Wikipedia - says: "Backtesting (or back-testing) is the process of evaluating a strategy, theory, or model by applying it to historical data. Backtesting can be used in ... studying how a trading method would have performed in past stock markets".


There are many articles on the Internet on back testing. Here is one recent that talks on common mistakes in back-testing How to Backtest Your Trading Strategy Correctly

Up until now I have been visually back testing the system using historical charts some of which I published. I have been mostly using 7 week period and 2 as a multiplier for our ATR-based entry and exits. These parameters work well for most securities and on most time frames from monthly all the way to intra-day.

Vacation time

I'll be on vacation next week. I expect to update the signals on September 17.

We are staying in cash and bonds still despite this rally. I'll update the table and charts this coming long weekend.

Happy Holiday everyone!

No new signals. Backtesting.

There has been no new signals since last update about a month ago. We are staying in cash in bonds.

Meanwhile I have done some back testing and am planning to share my progress.

Stay in cash and bonds

There is no news signals. Stay in cash and bonds.

Thank you for checking in.

No updates this week. Upgrading the software and running back tests.

The market and funds did not move much last week. I am not updating the table as I am upgrading the software,  back-testing our trend following strategy and also experimenting with parameters. Am very exciting with the results that surprised me a lot. Will share this week.

The table has been updated. VTINX and MSIQX each got an extra row.

VTINX and MSIQX switched long on 2,7 chart. From now on we'll track additional set of parameters that make these funds whipsaw less.

A confession to make - VTINX and MSIQX

Two of the funds followed in the Current signals - VTINX and MSIQX - hit their respective reversal points last Thursday. Click on the charts below to enlarge.

Had the market held the next day, I would have had to buy the funds on Monday despite my rather bearish outlook on the market. I have to admit, I would have hated having to buy at this time and it would've been difficult for me to execute. It would've felt like throwing money into a fire.

There are two distinct issues we should think about.

1. A natural or, at least, common tendency to try to "outguess" the system: It is a completely psychological issue and we have to learn to resist it. In general, trend following systems have low reliability, meaning, only about 40% of trades conducted according to such systems are profitable. That is a given and it needs to be accepted up front.

2. Testing and adjusting the parameters of the system: The parameters of the system can and should be tested and adjusted as needed. A chart below illustrates this.

VTINX hit 10.73 eight months ago and it is still there. Those who have held, have not made any money, but they have not lost money either. On the other hand, those who executed the signals have actually lost about 1% of this position.

For example, if an investor had 100 shares of VTINX, eight months ago his position was worth $1073. He would then have only $1066 after selling his shares for $10.66 in January - see the arrow Down. He would buy 99 shares for $10.76 - arrow Up in March that he would sell for $10.86 in May. He then could have bought no more than 99 shares at $10.80 or above now if we had got a buy signal.

Also, if this is a 401K or other "regulated" plan, then the investor might have been restricted on how often he is allowed to get in and out of a fund (over-trading rules).

One solution to this issues is to adjust parameters to reduce the number of signals. Here is the same chart with three ATR stops.

Another illustration from the last week is Morgan Stanly International Fund. This is how it looks with our standard 2 ATR 7 week parameters

and this is 3.5 ATR 6 weeks

The table has been updated. Market fell. Bonds inched up.

Two of our funds VTINX and MSIQX were about to signal long, but abrupt and severe drop last Friday kept   us in cash. The only position we continue to hold long is bonds and, of course, cash. "Cash is a position." 

Farrand's "We trend follow"

It is always a pleasure to meet like-minded people or their blogs. In my opinion, Chuck Farrand's We trend follow site is worth spending some time with.

Though I can't agree with everything he says - for example, the idea to go in with 100% of the money at once - he's done a fair job explaining and promoting the trend following approach. Also, he presents a decent plan.

I think there are better methods than the MA cross he advocates, but it simple and it works. We'll discuss it in more details when we get to comparing it with other trend following systems.

I kinda liked his "A simple way that you can become your own financial advisor using the trend following plan developed by Dick Fabian" header.

The table has been updated. Market erased last week loss.

Market jumped up erasing losses of the previous week. Nevertheless, ALL equity funds remain on Sell while we continue holding bonds that went down just a tiny bit this week.

The 401k Fallout

Since this is a blog format, posts are being always sorted in chronological order. I label each post to group them by topic. This one goes into General section.

If you are to watch the video, read this article first to see how different sentiment toward 401K was back in 1997.

The video was broadcastred on April 19, 2009 when S&P was 870. Today, just a little over a year later, S&P stands at 1023 after hitting 1217 just two short months ago. That's a 16% loss in two months.

Comments to the video can be read here and a short interview with Steve Kroft here.

The table has been updated. Reversals have got below Sell.

Market continued its move down, so ALL equity funds remain on Sell while we hold Bonds.

Notice that reversal points also came down this week for all funds (except for MS International MSIQX that did not change much over the last 7 weeks) and now stand at or below the last sell points for most of the funds. In other words, when the market goes up we will be buying back the funds for less than we have sold thus locking at least some profit. This is the goal of following the model - staying in cash when market drops significantly.

The table has been updated. Bond index added.

All funds remain on Sell. Bond portion of my account just made 5% year to date.

I know I should have added to bonds long ago. I'll talk about that when we discuss asset allocation and scaling.

I have no chart for the fund I hold, so I added Barclays to the table as an orienter. The chart is beautiful. I may adjust parameters to allow it some more room.

The table has been updated

All funds remain on Sell signal, two approaching their reversal points: Morgan Stanley International (MSIQX) and Vanguard Target Retirement (VTINX).

Is this a good point to sell and raise cash?

I was asked today whether it is a good point to sell mutual funds in 401K and go into cash?

Before I share my view I have to remind you that I am not a financial advisor and what I write here is just my personal opinion and not an advice to buy, hold or sell any security whether in a retirement account or otherwise.

I see I need to put up a disclaimer, I will as soon as I can.

Having said that, my short answer is NO. Before I provide a long answer I need to disclose  that I have sold ALL mutual funds back in May based on the signal of the trend model I am using. See a table here: Current signals

Why is that I would not sell today? Cause it would have been more of an emotional decision than one based on a systematic approach. The whole idea of this blog is to offer a rational approach to managing a retirement account that does not offer too many choices. The approach is to follow weekly trends an manage the risk through an appropriate position size (will talk more on that).

I am taking the question I was asked as an opportunity to illustrate my point that if there is no system in place then we put ourselves in a very difficult position where we worry all the time and try to make decisions based on probabilities. It is still possible but it is not the game most of people like playing.

What an S&P chart shows is that the market is still retracing the plunge from the April high.We talked about that - see this post. It will be difficult for the bulls to drive this market higher being pressured by overhead resistance (see below), yet they managed to break above 1110, and we have to respect the fact.

This ~1110 area now acts as a support while ~1130 area is a resistance cluster (pointing down 50 day EMA is 1120, 50% retracement is 1130 and 50 day SMA is 1140). One important warning sign I want to mention is declining volume. If S&P breaks down below 1110 I'd get out. Until then I'd stay in selling portions of my position into any rally as we get closer to 1140.

To summarize, trading is a difficult and emotionally demanding game most people do not want to be involved with. I devote my time to this blog with intent to offer a simple (it is actually a bit simplistic) approach to managing retirement money; this approach is about following the trend via utilizing a mechanical system and managing risk through position sizing. This approach is not popular among financial planners and somewhat  contrary to what they advice.

Phil Grande one more time

Could not help posting. Phil talks Pelosi, Reid, Meg Whitman, Boxer, exporting jobs, Larry Summers, Wall Street and the market.

Phil Grande radio show June 8, 2010

Protecting Your 401(k) When Markets Tumble

I came across this article that is a good example of what we are being told. The author is a "markets and investing writer for Daily Finance. He spent 13 years covering investment and business news".

I did not expect this Stay Fully Invested advice in an article with Protecting Your 401(k) When Markets Tumble title. Did you?

A recent article on trend following

Just wanted to share a link to an article. Notice that the article in turn offers links to related subject, in particular position sizing and money management.

S&P

Just to be objective, we have to admit S&P weekly looks rather bullish than bearish after somewhat     decisive bounce off of its 105 support. I say "somewhat" cause the move was on a light volume.

That been said, our weekly model remains on "sell" signal, and I am going to stay in cash.

It is not to say the bounce is not "tradable". If market remains bullish for a while we may see SPY as high as 115, but it needs to break above 111 first. It is worth mentioning that potentially it may form the right shoulder of the H&S pattern. I'll talk more on that if things develop in this direction. Below is a daily chart.

Phil Grande on 401K

I am a fan of his. Yes, I know that he often gets too grumpy. I do see his limitations if I may say so. Yet I respect the man. Anyway, here is his radio show dedicated to 401K plans (June 1, 2010).
Phil Grande radio show June 1, 2010

Trend following

Here is a definition of trend following from Wikipedia:

"In finance, trend following is an investment strategy that tried to take advantage of long-term moves that seem to play out in various markets. Traders who subscribe to a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it."

This is a very informal interpretation, but it serves the purpose. What we attempt to do is to participate in long-term moves without predicting, we "simply jump and ride".

To illustrate that it is possible, here is a link to one of the most famous study on trend following by Col Wilcox and Eric Crittenden that they titled  Does Trend Folowing Work on Stocks?

How it started

I've been working on another blog with my friends, investors and traders (I'll post a link here when the blog is out), and did not have any plans for my own blog, especially on retirement. Not that I don't care about retirement, but I did not think my 401K might be a subject of a blog.

It all started with an e-mail that I sent out to about 15 people with an idea to exchange thoughts on managing retirement (mostly 401K) accounts in 2010. Here is what I wrote back on January 8 of 2010:

2008 was a year to be in cash. 2009 was a year to be fully invested in stocks and bonds. I suspect the next two-three years might be very bumpy.
If you have any idea in regards to how to allocate the money for 2010 or find any relevant information about the funds, please, share.

I learned over time that most people are not actually interested in managing their 401K (or other types of retirement) accounts. Another thing I learned was that most of those who are interested and manage their accounts believe that spreading money more or less evenly across the mutual funds and adjusting allocation towards bonds as we are aging is all that is needed. The mutual funds "will take of themselves" is a prevalent attitude.

I thought, being engineers, we should be able to find some kind of an orderly approach to the job. I did understand that I probably would not find one that I'd be 100% happy with, but at least I'd research what was available out there. The purpose of this blog was to share my findings and my experience with 401K. Most of what I am going to talk about here is also applicable to other retirement plans like 403 457 and any IRA accounts for the matter.

Below is a link to one of many articles on the subject: 7 401(k) Mistakes You’re Probably Making - Planning to Retire (usnews.com)

International fund in Applied Materials 401K plan

I was asked to also put up a chart of the MSIQX. Here it goes.

Morgan Stanley Institutional International Equity Portfolio Fund

I doubt person(s) responsible for Applied Materials 401K will get to this blog, but just in case: I have been   always surprised seeing how poor the variety of offered investment choices is. There are really good companies out there that not only offer much, much better choices but also professional portfolio management. Here is just one of them: http://www.kppfinancial.com/aboutKPP.html.

Disclosure:  I have no affiliation with KPP Financial. 

S&P and MSFT plus AMAT

S&P 500 (SPY)

Microsoft (MSFT)

Keep in mind that most stocks have much more volatile chart and this model won't work for them. Compare for example with AMAT chart below.

Pictures first explanations later.

Market is falling fast and I want to upload a few charts before it is too late.

Fidelity Contrafund

Fidelity Equity-Income Fund

It is trembling more than the Contrafund, so, one may want to give it some more leeway like below

Spartan 500

T.Rowe Price Growth Stock

Vanguard Mid-Cap Index Fund

Vanguard Target Retirement