Technical Analysis DeMystified Book Review

I like the idea of Core and Explore investing. If you're not familiar, the approach is to safely invest the core of your retirement, +85% into low cost index funds across an appropriate asset allocation model that fits your age and risk level. The small remainder is set aside to allow you to flex your personal investing prowess. It is not money that you use to bet the farm, but money that will allow you to try your hand and test your knowledge. Your type of exploration can be fundamentalist driven or technically driven.You can still buy index funds, it's up to you.

I lost a chunk of my Explore fund with the demise of the market in 2008; and due to my inexperience and lack of sufficient study. I was disheartened, but not broke because my Core was still intact and chugging along just as it should. I am now in a position that I want to begin working proactively in my Explore fund once again. Note: This is not due to recent market sentiment and the major indices reaching new highs, but rather the re-establishment of the cash in my Explore portfolio. While I love the idea behind ShareBuilder and their automatic investing plans - it is also wise to consider transaction costs. I've read that transaction costs should not be more than 2% of any trade. If you invest at ShareBuilder, at a $4 automatic trade, it is suggested that your minimum buy order should be $200, otherwise you're losing too much to transaction fees. But I digress...

I checked out the book Technical Analysis Demystified: A Self-Teaching Guide by Constance Brown. Because of my previous investment history, I was already vaguely familiar with some of the technical indicators that are available to help you examine a stock chart and understand and predict the price movement therein. Nevertheless, I knew that I didn't know enough. It should be understood that Technical Analysis differs from Fundamental Analysis. Technical Analysis is the study of the charting and claims that the chart will hold all the price information you need to trade. Trading based on chart analysis and price projection is known as market timing. Warren Buffett doesn't follow this method. His method is that of company valuation, the Graham number, P/E, and a long term buy and hold approach. I recently reviewed a book about Buffett's investing style.

Constance Brown, however, has written several books about Fibonacci analysis, the Elliot Wave Principle, and more in depth books than this beginner's guide, Technical Analysis Demystified.
In fact, there are so many technical indicators that are covered in this book that it feels like browsing the buffet line - endless choices but not enough time to really sample any one sufficiently to form an opinion about, let alone establish any appreciable skills.
The technical indicators covered in this text include several from momentum, breadth, and sentiment. The author stresses that a trade should have two of his three non-correlated methods giving permission to enter the trade. 

For the novice trader, this book will open your eyes to another dimension of trading. The author, graciously, is not a hyped up salesperson trying to convert you. While profitable trades are set up and explained, caution and understanding and risk assessment are all equally stressed. The author quizzes your intent to make a trade.

"Do you have confirmation in other stocks in the sector?

Do you have permission from your indicators at a key support or resistance level? 

Can you find evidence to support your opinion in other makrets that correlated? Can you establish a postion risking less than 3 percent of your portfolio? Do you have a minimum 3-to-1 win-to-loss ratio?"

I think this was a very worth while read. And while I probably won't be using astrological events as part of my technical analysis toolbox, I did learn that using two oscillators, such as a fast stochastic indicator and a slow moving-average convergence divergence (MACD) indicator, provides only one market analysis approach, not two.

Dollar Cost Averaging with SPY

I wanted to take a more definitive look into dollar cost averaging. Admittedly, the first time I explored dollar cost averaging, I picked a relatively new index fund without much history and the price data was gathered very roughly by manually reading values off a Yahoo! Finance Chart.


 
This exercise in the merits of dollar cost averaging use actual historical price data, ranging from January 1993 to April 2010, for the SPY index fund, which tracks the S&P 500. I wanted a more in depth view of the differences in yearly lump sum investing and monthly dollar cost averaging. What I found was that when the lump sum investing continues at a regular interval for several years – it becomes just another form of dollar cost averaging. The important point being the regular interval which occurs on autopilot and is not subject to our personal fallacies encountered in market timing. In summary, the plots that follow will illustrate that the normal investor can still dollar cost average even when there is only one investment per year. Think of the brokerage fees saved! Unless, of course, you are trading your ETF's for free already.


 
Dollar cost averaging works on whatever schedule that you can afford to set up. The smaller the frequency, the smoother your curve will be. 

The other point that this plot serves to illustrate is the basic premise behind dollar cost averaging. Every period you invest a set dollar amount. When the market is high, you buy fewer shares, but when the market is low, you buy more shares.

Date	# of Shares Purchased
4/2000	8.112
4/2001	9.197
4/2002	10.699
4/2003	12.346
4/2004	10.067
4/2005	9.465
4/2006	8.189
4/2007	7.167
4/2008	7.541
4/2009	11.621
Total	94.404

 

I'd like to focus this next portion on just the last ten years, or what many people like to call "The Lost Decade". I have found that many market analysts like to point out that if you had invested $1,000 in April of 2000, it would only be worth $949 today. Ouch! Why should we invest then?

While this statement is true, it should not bother the slowly marching forward dollar cost averaging portfolio owner. Why? Just take a look at the next chart that shows what each $1,000 contribution made to your total investment portfolio over the last 10 years.

 
Or, if you prefer, a nice pie chart.


 

 
The moral of the story: Slow and steady wins the race. The years the market was down the most, 2003 and 2009, are the years that contributed the most to the success of this fund. The years the market was up the most, and when herd mentality was gathering in more and more investors, in 2000 and 2006-2008, are the years that contributed the least to the success of this fund.

Commission Free ETF Expense Ratios from Fidelity

Naturally, we are creatures of habit. And we are familiar with the phrase, "if it ain't broke – don't fix it!"

What would cause me to go to all the trouble then, of switching brokerages and switching my investments? That just seems like a lot of hassle. I learned some things. Specifically, I learned about the power of compounding and just how much money could be lost from my future retirement through owning expensive funds. Forbes March issue illustrated this point by comparing the difference of expense ratios between EEM (0.78%) and VWO(0.27%).

"Spend half a percentage point a year too much managing your money and you will, with compounding, drain away 14% after 30 years. If your ending stake would have been $1 million, you've wasted $140,000. You could get a nice car with that kind of money."

Yikes!

Pain is a powerful motivator. When the pain of the same is greater than the pain to change, new growth can occur. Below I have tabulated the expense ratios for the 25 iShares ETF's that Fidelity is offering commission free when you trade them online.


 

U.S. Equity Index Funds	Symbol	Yield	Expense Ratio
S&P MidCap 400 Index	IJH	1.25%	0.21%
S&P MidCap 400 Value Index	IJJ	2.00%	0.28%
S&P MidCap 400 Growth Index	IJK	0.60%	0.25%
S&P SmallCap 600 Index	IJR	0.97%	0.20%
S&P SmallCap 600 Value Index	IJS	1.56%	0.25%
S&P SmallCap 600 Growth	IJT	0.38%	0.25%
S&P 500 Value Index	IVE	2.54%	0.18%
S&P 500 Index	IVV	1.94%	0.09%
S&P 500 Growth Index	IVW	1.40%	0.18%
Russell 1000 Index	IWB	1.95%	0.15%
Russell 1000 Value Index	IWD	2.35%	0.20%
Russell 1000 Growth Index	IWF	1.40%	0.20%
Russell 2000 Index	IWM	1.14%	0.24%
Russell 2000 Value Index	IWN	1.78%	0.33%
Russell 2000 Growth Index	IWO	0.50%	0.25%
Russell 3000 Index	IWV	1.84%	0.21%

 

International Equity Funds	Symbol	Yield	Expense Ratio
MSCI ACWI Index	ACWI	1.34%	0.35%
MSCI EAFE Index	EFA	2.74%	0.35%
MSCI EAFE Small Cap Index	SCZ	2.36%	0.40%
MSCI Emerging Markets Index	EEM	1.49%	0.72%

 

Fixed Income Funds	Symbol	Yield	Expense Ratio
Barclays Aggregate Bond	AGG	3.80%	0.24%
Barclays TIPS Bond	TIP	4.09%	0.20%
iBoxx $ Invest Grade Corp Bond	LQD	5.41%	0.15%
JPMorgan USD Emerg Markets Bond	EMB	5.64%	0.60%
S&P National AMT-Free Muni Bd	MUB	3.59%	0.25%

 

Previous Personal Investments	Symbol	Yield	Expense Ratio
Fidelity Growth & Income	FGRIX	0.72%	0.78%
Ivy Science & Technology A	WSTAX	0.00%	1.50%
Ivy Global Natural Resources A	IGNAX	0.00%	1.40%
Ivy Small Cap Growth A	WSGAX	0.00%	1.71%
Ivy Core Equity A	WCEAX	0.21%	1.46%

 
Morningstar ran an interesting article examining Fidelity's motive for offering commission free ETF trades.
Regardless, "if investors choose to use Fidelity's platform for both their "core" and "explore" portfolios using ETFs, it looks like investors will still be getting a great bargain."




Regardless of where you decide to invest it is important to remember that commission costs are a very important part of the investing equation.
 
GetRichSlowly had a guest post from Adam where he talks about how he keeps hanging on to his old bank even though he doesn't like it all that much. What does it take to make you change?

I think the answer to that question is when the pain of the same becomes greater than the pain of the change.

Take a look at your current investments and your current broker. Are you happy with either? Have you been fantasizing about a different brokerage? If so, then take a second to look at your current commission costs, expense ratios, customer service, etc. and run the calculations to find out which nice car you won't get to drive in retirement. It just might be the motivation you need.

Alternatives to My Decisions on Investing

You don't like that I went with Fidelity. You hate that I chose to invest in an ETF. You abhor lazy investing. You crave something more fun. That is okay if that is what fits your personality and your level of risk.

Can't quite decide between the two giants, Fidelity and Vanguard? Head over to Metafilter for some more discussion on which might be the right place for you.

Don't like the giants cause you want to run your own show? MyMoneyBlog has a great review of several other brokerage houses where you can open a Roth IRA. The list includes TradeKing - whom I also use for trading.

Like individual stocks better than index funds or ETF's? Yahoo! Finance is a great resource for researching your latest best pick, and they also offer great guidance from a collection of expert columnists and partnerships. 10 stocks that can keep running even if this bull rally loses steam will point you towards big blue chips like Exxon Mobil, J&J, and Sysco; healthy dividend players like NSTAR, Exelon, Paychex, and Realty Income; and surprisingly - HealthCare with the likes of Novartis, ThermoFisher Scientific, and Well Point.

Need better ideas than just some more blue chips? Steal them. That is what some people do by following popular, and successful fund managers. It makes sense. If they have a good track record and you do your own follow up research you might find some good ideas that way. 

And finally, some more stock ideas based on economic indicators was illustrated by The Street. Interest rates --> Bond yields. Housing Starts--> Construction stocks. Inventory levels --> Commodities. Personal income and discretionary spending --> Retail stocks. Essentially, if you follow a regularly reporting economic indicator, chances are there is a sector ETF that will track it because it is based on the stocks that would react the most.










You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

Dollar Cost Averaging: An In Depth Investigation Using EEM

Money is burning a hole in my pocket. With my brand new Roth account and newly transferred funds I am itchy to spend it. I already decided on which fund I need to buy to reach my target portfolio goals, so why haven't I purchased the iShares Emerging Markets ETF yet? I am waiting for the perfect time to invest, of course!

I recently quoted an article by Morningstar that raised a flag of caution for investors to not succumb to the temptation of using commission free ETF trades to begin market timing. Market timing is highly debated and is very alluring. In fact, MarketWatch just released an article on several different strategies for taking advantage the seasonal trends in the marketplace. Essentially, they were outlining well used market timing strategies. 

Once upon a time, when I was a greedy investor, wait, I still am! Okay, once upon a time when I was a novice investor, I would have been thrilled to read about seasonal trends in the marketplace. If the market experienced regular trends that were seasonal then that meant there was an opportunity for me to take advantage of that trend and increase my yearly yield. Timing is everything. We all know that. If we had just known to invest all of our money last March when the market bottomed and made its turn around. Or if we had just known to pull our money out before the market fell off the abyss in 2007-2008. Yes, hindsight is always 20/20. IF we had known. Trouble is, we live in the present and we do not know what the future will bring.

I now know that dollar cost averaging is the right answer. I have read about it and seen the research. But to convince myself, I wanted to run the numbers myself. Since, I am going to be investing in EEM, it will be the point of this study. I went back and recorded, roughly, what the price of EEM has been for the last three years during the mid point of each month into a spreadsheet. Then I created several different investing scenarios to illustrate lump sum investing, or market timing, and regular, automatic investing known as dollar cost averaging or Value Averaging. 

Since this is a Roth account, my year to year analysis is from March to February of the next year because a lot of people make their Roth contributions right before the April 15th deadline for prior year contributions. And because the last three years provided me with the perfect worst year, best year, and good year data to explore the different options and scenarios. The results are very interesting. Granted, EEM is a very new fund without even a full 10 year history.

Let's start out with one really bad year. From March 2008 to February 2009 time frame was a bad year. In fact, EEM saw a 54% decline. Ouch! So, what would your fund value be in Feb 2009 if you invested $5k in March 2008, versus a steady $416.67 per month?
DollarCostFund = $3,530.15
LumpSumFund =  $2,650.38

In contrast, let's examine a great year. From March 2009 to February 2010 time frame was an awesome year. In fact, EEM experienced nearly 80% growth. Wow! So, what would your fund value be in Feb 2010 if you invested $5k in March 2009, versus a steady $416.67 per month?
DollarCostFund = $6,032.37
LumpSumFund =  $11,298.81

Yeah, but what about longer term. If you had the stomach to sit through those past two years and just kept to your guns from March 2007 to February 2010 time frame EEM only grew by 3%. So, what would your fund value be in Feb 2010 if you invested $5k in March every year, versus a steady $416.67 per month?
DollarCostFund = $16,911.20
LumpSumFund =  $21,616.31

Should I be worried that the lump sum investing performed 28% better than dollar cost averaging? No, not really, because the yearly lump sum, if done regularly, is also dollar cost averaging. I generated the last plot to better illustrate the point of a person actively deciding which month to invest. I picked the best months during each March to February year and the worst months to invest. The average person probably wouldn't pick the worst times, but they also are not likely to pick the best times either. So, what would your fund value be in Feb 2010 if you invested $5k at the best times, and the worst times, versus a steady $416.67 per month?
DollarCostFund = $16,911.20
BestLumpSumFund =  $26,027.71
WorstLumpSumFund = $12,644.39

 In conclusion, dollar cost averaging never produced the best results, but it did reduce risk, and performed better in a bear market. Additionally, dollar cost averaging has the added benefit of being automatic. One of the great things about using automatic systems is that you can set them and forget them. Imagine if you were simply too busy and just left your cash contributions rotting in a money market fund last year!

 Which path will I take? I have contributed the max amount, $5k, for my 2009 year contribution to my Roth IRA. Will I try and time the market based on my gut feel, the current price, the current news stories? Or will I just take the long and boring road to average wealth? Yeah, time to figure out how to set up automatic investing inside of Fidelity.

How about you? Does this analysis make you reconsider your stance? Does it reinforce your current behavior?

You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

ETF's and lazy portfolios

I wrote a lot about my decision to invest in some ETF's and I am sure some of you may be wondering why ETF's and not index funds and what is the difference anyways. Honestly, the biggest reason for investing in ETF's for me was availability. Well, that was easy. So what is the difference?

I finally found a really great answer to the question about ETF's and Index Funds and their differences. For example, what is the difference between Vanguard ETF VNQ and Vanguard Index Fund VGSIX? The key differences being that index funds are offered by a fund management company and may require a minimum purchase and they do not trade on the open market throughout the day. ETF's are just the opposite. If you have a brokerage house, you can buy and sell them anytime you want. 


Ooohh, buying and selling anytime you want. Couple that with no commissions means you could have almost as much fun as a day trader, right? That is the concern expressed in this Morningstar article. The author writes that the incentive to gain new accounts may have unintended consequences. While it is generally accepted that ETF's are a smart investing choice, providing commission free trades may entice traders to try and time the market, or trade more often than necessary, thereby reducing the good qualities of the ETF through the traders own bad behavior. 

investors might be inclined to trade simply because they can, even though academic studies have proven that the lazy investor is invariably better off than the one who trades with great frequency.

What? You mean hard work does not pay off in the investing realm? Nope. The lazy investor and the lazy portfolio have been celebrated at providing what we need most when it comes to building our nest egg. Slow and simple wins the race. A lazy investor is one who sets his investments on auto pilot and forgets them, mostly. Kind of the advertising you might see from ShareBuilder.

What is a lazy portfolio? It is a collection of funds that match an asset allocation and your aversion to risk. No active trading, no picking individual stocks, no market timing, just lazy, boring, automatic investing. The Mad Money Machine actively compares professional lazy portfolios here. But an easier introduction to sample lazy portfolios is illustrated with five great examples by GetRichSlowly. JD explores portfolios named The Couch Potato, The Three Fund, The No-Brainer, The CoffeeHouse, and The Perfect Portfolio. While my personal portfolio, current or target, does not match these five exactly, I have learned much from examining them.

And finally, here is a link that you can use to test out your current, or target, portfolio to see how it stacks up.
From their website,

Icarra is a powerful web-based portfolio management system that:

• Accurately tracks your portfolio
• Calculates portfolio returns (including IRR)
• Generates flexible charts
• Allows you to find new investing ideas from other users's shared portfolios

Icarra is a free service.

What is your opinion of lazy investing? Is it just too boring for you? Share below in the comments.

You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

Selling Your Investments Means You Get to Buy New Ones

This is the third post in a series about Selling Your Investments.
In the first post I chronicled how I overcame my fear of selling a long term asset.
In the second post I explained why I chose to sell this asset at a loss.
In this third post I hope to explain what I am going to buy with all of that cash!

I opened my Roth IRA with Fidelity partly because of their recent offering of 25 iShares ETF's which trade commission free. Naturally, I looked at these options first to see if they would complement my current target asset allocation strategy. I also compared the options to the funds that are available to me in my workplace 401(k). Surprisingly, my workplace 401(k) is really not as horrible as some people have. In fact, after reviewing my current plan I determined that only a minor adjustment in my 401(k) contributions is needed to keep me on track. The analysis of my 401(k) contributions quickly narrowed down the field of choices for where I wanted my money to go in my Roth account. My 401(k) has great S&P 500, US Total, Bond, and Foreign Large funds. This leaves US Small Caps and Emerging Markets and REITs as the only areas I need to focus on with my Roth in order to reach my target asset allocation. 

Below is a chart of my target allocation. How did I come up with such a complicated piece of pie? I explored several different options. I chose an allocation strategy that was heavier in stocks than bonds which reflects both my time frame and my risk level.

Compare that to my current asset allocation - and the choice became very clear where all my cash should go: Emerging Markets. And, Fidelity now offers me a great vehicle to do that in: EEM. The biggest question I have is whether I should just do a lump sum investment, or dollar cost average over the course of this year?

 

This pie chart is due to change dramatically this year as I continue exploring the iShares offerings and developing a strategy to exit some of my other high expense ratio mutual funds. Some of my mutual funds have an expense ratio of 1.5%. Ouch! When compared to some of the iShares ETF's that have expense ratios of only 0.20% the new path forward becomes a bit clearer.

I'll try and provide new updates as the pie charts makes big changes this year.


You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions

You Can Lose Money Selling Your Investments

Yesterday, I wrote about how I sold the first mutual fund I ever owned, FGRIX. One of the hardest parts about selling an investment is that when you go to sell your asset - you may be looking at selling at a loss. Granted, with the recent market turbulence, you may think - everyone is facing a loss right now. 

But what if you are choosing to sell - even in the face of a loss. Do not fret too much. If the asset is in your taxable account, you can write off up to $3,000 on your taxes this year. If the loss was more than that, you can actually carry forward the loss and continue to write off an additional $3,000 each year as needed.

Buy why would you ever want to sell an asset at a loss? Lots of reasons. Let's just look at why I did. I wanted to make my annual contribution to my Roth IRA and had decided that the best source of that money, $5,000, should be from my taxable investment account. Last year I made the mistake of just transferring the assets straight across from my taxable account to my Roth account. One call to the broker facilitated this easy move. Why was that a mistake? Because I didn't know then what I know today. I understand the wash rule and expense ratios and ETF's and index funds and asset allocation. Last year I transferred several mutual funds with very high expense ratios into my Roth. Today I am considering selling those mutual funds, just like my mutual fund from yesterday. If I would have sold the mutual funds while they were still in my taxable account I could have written off thousands from several years of tax returns. That is tax loss harvesting. I need to make an adjustment with my assets, so I harvest losses solely for the tax purposes.

This year, I sold my mutual fund and I plan on transferring the cash to my Roth and using that cash to purchase new, cheaper mutual funds or cheaper ETF's and index funds that better match my target asset allocation.

Caution! The IRS does not allow you to simply sell your asset in your taxable account and then immediately repurchase the same, or even very similar, asset in any of your accounts, retirement included. Sorry, you cannot sell and rebuy just to get a nice tax break. This is known as the wash sale rule. In order to book the loss, it must be at least 30 days before you buy back that asset. 

So, last year, I missed out on a perfect opportunity to catch a tax break because of the wash sale rule. Not this year! Check back tomorrow to see what fund I finally decided to buy in my Roth from the proceeds of my sale of FGRIX.

Have you ever done tax loss harvesting?


You may also be interested in reading:
You Can Lose Money Selling Your Investments
Selling Your Investments Means You Get to Buy New Ones
ETF's and Lazy Portfolios
Dollar Cost Averaging: An In Depth Investigation Using EEM
Alternatives to My Investing Decisions