Tag Archives: roger-nusbaum

Managing ETF Liquidity

Over the years, certain ETFs have had problems with pricing in the face of extreme market events. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. By Roger Nusbaum, AdvisorShares ETF Strategist ETF.com had a detailed post titled ” How Illiquid Are Bond ETFs, Really? ” Over the years, certain ETFs have had problems with pricing in the face of extreme market events. This first came to the fore in the fall of 2008 for fixed income funds, when the bond market didn’t function correctly for a short while (subjectively you may think a long while, as the markets for commercial paper and floating-rate preferreds were devastated). Since then, there have been a couple of other instances where ETFs “didn’t work” for a very short period. Part of the equation, as we learned in 2008, was that ETFs trade more regularly than the things they track. However, this can be true for fixed income markets, for example, but typically not for domestic equities, which is a point Dave Nadig explores in great detail in the above-linked article. If you use ETFs, then you should read the article to better understand the potential drawbacks to using ETFs; but there are also drawbacks to traditional funds as well as individual issues. One solution is to not invest at all, which I am not dismissive of, but the drawback there would be the need for a much higher savings rate. It has been three months since that 1000-point down open for the Dow, when a lot of these ETF issues popped up again in conjunction with investors and advisors getting whipsawed badly as stop order selected based on an inefficient open where funds traded at very wide discounts. As an “oh by the way,” if you missed it, the NYSE and Nasdaq will no longer accept stop orders. The idea that investment products have drawbacks is not a new one as far as this blog is concerned, but maybe it is correct to that the drawbacks are evolving, or we are learning more about them at least as far as ETFs are concerned. Where there is risk that ETFs may not price correctly or efficiently, it makes sense to position yourself where you are not subject to the risk, specifically being in the position where you must sell when one of these extreme market events is under way. This is not a comment about timing the market, but more like “Ok, the market just fell 8% in ten minutes, it’s probably not a good time to sell for the monthly withdrawal or rebalance.” (Assuming speculating on an extreme market event is not part of the investment strategy.) I also think this is an argument against an all-something (ETF, traditional fund, individual issue) portfolio, as opposed to having various types of products. It is also about cash management. Most advisors will tell you not put money into the stock market that you might or will need within five years, like a down payment for a house or college tuition, with the idea being that five years may not be enough time to recover from a large market decline. While keeping five years of cash on hand as part of an investment strategy in retirement is not ideal, it makes sense to stay ahead of the regular withdrawal need by a couple of months or so. That way, an intention to sell on the morning of August 24th can be pushed back to avoid participating in temporarily extreme trading. Emergency needs can also be mitigated. We talked about this before, but in addition to regular spending, there are one-off events that can be budgeted for very easily, and that do seem to come up semi-regularly. Examples of this includes new tires, vet bills (one of our dogs tore her cruciate in October), something with the house and so on. I am a fan of segregating several months of emergency funding, maybe assuming $1000/month, and all the better if not all of it gets spent, but it is another way of not selling today because you have today to pay for something. A fundamental building block for how I view just about everything is to try to give myself as many options as possible, and it relates here. ETFs offer access and ease of diversification, so instead of avoiding them, understand the drawbacks, insulate against those drawbacks and use different types of products. It doesn’t really matter if an ETF traded at a 20% discount to its IIV for 40 minutes on August 24th, except to the person who sold in the middle of that because he “had to.”

Myopia & Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.”. Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now it is one of many things frequently forgotten in the heat of a large decline. Additionally we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.

Myopia And Market Function

Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Myopic loss aversion can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. We know that there will be future bear markets and probably another crisis or two in most of our lifetimes. By Roger Nusbaum AdvisorShares ETF Strategist The Wall Street Journal posted an article written by Shlomo Benartzi who is a professor at UCLA specializing in behavioral finance. The article primarily focuses on the behavioral problems, like myopic loss aversion, that can arise when investors check their account balances or the prices of their holdings which thanks to technology has become increasingly more convenient to do. Benartzi defines myopic loss aversion as making “investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan.” Benartzi cites that the stock market has a down day 47% of the time, a down month happens 41% of the time, a down year 30% of the time and a down decade 15% of the time. We’ve talked about this before, going back before the crisis albeit with some different wording. Before and during the last major decline, as well as many times since then, I’ve said that when the market does take a serious hit that it will then recover to make a new high with the variable being how long it takes. While this seems obvious now, it is one of many things frequently forgotten in the heat of a large decline. Additionally, we know that there will be future bear markets and probably another crisis or two in most of our lifetimes. And those future bear markets/crises will take stocks down a lot which will then be followed by a new high after some period of time. This is not a predictive comment, this is simply how markets work with Japan being a possible stubborn exception that proves the rule. It took the S&P 500 five and half years to make a new nominal high after the “worst crisis since the great depression.” If you are one to use some sort of defensive strategy, it is hopefully one that you laid out when the market and your emotions were calm and your strategy probably doesn’t involve selling after a large decline. My preference is to start reducing exposure slowly as the market starts to show signs of rolling over. Very importantly though is that if you somehow miss the opportunity to reduce exposure, time will bail you out….probably. I say probably based on when a bear market starts in relation to when retirement is started. If a year after retiring, a 60% weighting to equities that cuts in half combined with a life event at the same time that requires a relatively large withdrawal (this is not uncommon) it will pose some serious obstacles. I think the best way to mitigate this is, as mentioned, a clearly laid out defensive strategy but not everyone will want to take on that level of engagement. In that case it may make sense for someone very close to retirement and having reached their number (or at least gotten close) to reduce their equity exposure. Not eliminate, but reduce. Back to the idea of myopic loss aversion and how to at least partially mitigate it. Knowing how markets work and then being able to remember how they work will hopefully provide an opportunity to prevent emotion from creeping in to process and giving in exactly as Benartzi describes.