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August 18, 2010

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Overall, a nicely written article but....

I can't find a review or rating of forextraders.com in the Forex Peace Army.

www.nfa.gov is not a working link. I'd be surprised if there was indeed a government regulatory body for Forex markets. Googling the name does yield www.nfa.futures.org however, which describes itself as a self-regulating body.

barclayshedge.com also does not work anymore, but instead, goes to a domain holding site, primeinvestment.com.

Forex can be a dangerous and sketchy world to be dabbling into, and it behooves all potential traders to be especially wary of this market, which teems with market makers willing to bet against their own customers, all the way to fly-by-night scams that will out-right take your money, never to be heard from again.

The fact that this article have no working links, and worse, no verifications from the Forex Peace Army gives me a long pause.

Even if we accept this article at its face value, we do not have to take its specific advice and go into futures or even commodities trading. We can simply increase our % allocation in our international and emerging market mutual funds.

Forgive me, but this may be the worst article I've seen on FMF. It's not just inappropriate in my opinion, but the second to the last paragraph is both unnecessarily, if not dangerous, and should be ignored.

Eugene --

I've cut the sentences with the (non-working) links. They were working when I received the article (which was some time ago) but aren't now and since they appear to be sketchy, I've taken them down.

As for whether or not the piece offers good advice or not -- I'll let everyone debate that here. As you know, I like to let FMF be a place where alternative opinions are heard, and not all of them will be "great ideas." That said, hopefully most of them will be worthwhile. ;-)

Yeah, EK, I kinda had the same reaction, sort of like Ralphie in "A Christmas Story" :" Drink your Ovaltine? A freaking commercial?
Deja vu all over again, more like it. The more things change, the more they stay the same. This isn't news, its advertising.

crashdamage1957 --

If you're implying (or saying directly) that this is paid content, it most certainly is not. If I ever do receive funds for any posts, I will certainly reveal that information as part of the post. Besides, I'm not sure really who any "advertisement" would be for. There's not any specific product recommended that I can see...

I generally disagree with anyone that says the crash "changed all the rules." No, it reaffirmed the rules, especially the rule that you should be in safer investments if you are close to retirement!

The shift in relative economic power between the US and the rest of the world is developing, but it is not due to the global recession. We have enjoyed being so fortunate compared to the rest of the world. Now they are catching up. It's not a bad thing, but it will definitely rile some people up.

Interesting.. but if you call 2008 a "reset button," just stay tuned.

Wow, thanks for the quick response, FMF!

If we examine the article without the Forex and commodities trading references, then I do agree with its general prognosis: That this recession is likely to be drawn out and the pain will linger. Actually, we know this because we are in that long, drawn-out recovery process as we speak.

There is one small detail that bothers me about the article though: It's cherry-picking March 2009. Certainly, anybody can see that it is, so far, our lowest point in the Dow and S&P. And yes, many of us (including myself) may have suffered equity loss upwards of 30% to 60% in that point in time. However, if we look at it from today's vantage point (August 2010), and cherry-picking the highest point available on the Dow and S&P to give them the best light possible, that actually puts the Dow at -20% and the S&P at -10%. Still not good news, but it's not as bad as this article makes it out to be. This is especially if you had a properly-diversified portfolio that included asset classes other than domestic equities, which should lower your loss even more.

Another point to consider is that, this can also be a case to be made to DECREASE our volatility exposure, not INCREASE it as the article is suggesting. Certainly, I can buy that perhaps foreign markets may recover and grow quicker than domestic market, but that is NOT a guarantee. In the end, this is still an exercise in attempting to predict the future. If anything, the volatility experienced in this recession should have been lesson and a test of our true risk tolerance.

During this recession, many have adjusted their portfolio to a more conservative portfolio, but this article is suggesting the opposite by increasing foreign investments. That's like being told that there's going to be traffic congestion ahead, but rather than slowing down and follow the traffic safely, you should keep speeding, or better yet, go faster, on this alternate dirt road. That's fine if you really think you can handle the risk, but don't do it if you are not comfortable with it.

Either way, it's important to know what the article is saying and suggesting.

FMF - Oh no, I wasn't implying that at all, I meant the article itself ( which is clearly noted as a guest post ) as written is promoting "to invest in an investment fund managed by a Commodity Trading Advisor that specializes in trading foreign markets", with the intent of the original links to steer business to those sites. The writer views 2008 as some kind of tipping point game-changer, where all the rules have been rewritten, its all different now. But, change is constant, and as spivey noted, these "sudden changes" are only sudden when viewed myopically; these forces have been happening since way before 2008, more like 1978.

I'm not sure about the tone and some of the other aspects of this post, but I do agree that emerging markets could be a good part (even 20%) of your portfolio. If you are looking for diversification it can be better than other foreign investments (in my opinion). To check for yourself, look at the correlation of Vanguard's total stock market, total international, and emerging markets. Just re-balance often enough so that you take advantage of selling when it's high and buying when it's low compared to your US equities.

I still think that it makes sense to come up with an asset allocation plan that makes sense for your own financial situation , using dollar cost averaging and re balancing while "staying the course", rather than trying to time the market or up-ending an otherwise well thought out plan in reaction mode.

I think the main point we should all heed is that the rapid growth of the Asian economies in general, and China in particular, have resulted in the US being a smaller part of the world economy. Diversification implies much more foreign exposure than most people realize.

By definition, developing countries are ... developing, whereas the US, Japan, and most of Europe are mature. The developing countries will experience much higher growth rates simply because they are starting so far back.

I have lived in four countries on four continents, and it has amused me to note that in each one "foreign" was considered "risky", and "domestic" was considered "safe". In 3 of those 4 countries, the US was classified as "foreign". To the US, the other three are all "foreign". Two of the four were emerging markets, yet their financial advisors thought it more prudent to invest at home first, before the risky foreign markets of the US and Europe.

Risk and comfort are in the eye of the beholder.

Here's the main point to consider ....

You don't have to be a global stock trader to play the global market, but simply buy Blue Chip companies since they are global.

Fortune 100 companies now gather a significant portion of their revenue from outside the US and heavily invest in growing markets. They continuously analyze market opportunities and have sales in place to take advantage of the global economy in every major country in the world.

I have seen so many articles of do this and do that and don't do this and don't do that to the point that no matter what I do it will contradict what an article has said. I really think no one knows what is going on so I will continue to do what I feel comfortable with. Who cares about reset or shift, it is another buzz word for someone to latch on to.

I have no faith in what this article is telling me and has not convinced me to change anything.

I had 10% of my holdings in a diversified international fund and it has been the worst of all my investments. It has not done great and I have no faith in it any more. I have moved most of it to different investments that I have faith in.

@dd: Fortune 100 companies do not give you good international exposure. The vast majority of business in many of those countries is controlled by non-US companies. US companies only expose you to the part of the market which is buying American. You will miss out on the rest, which is the majority.

@Matt: Interesting article in a recent Kiplingers or Money mag - showed that people in "patriotic" states invest more in the US than outside. I love America as a place to live and work, but I can't live on that. I don't know what international fund you owned, or your timing in it, but over a 25-year period, I have done very well with foreign funds.

Investing has certainly changed over the last couple of years. Many people saw their IRA's decimated and stock portfolios emptied. Diversification is important--don't put all your eggs in one basket. Define your ability to accept risk and loss. Seek professional advice,however,nobody cares about your financial future more than you so stay informed and involved in your financial plan.

There are a few good points about the article, so I think diversification is the key here. With the economy like it is, one has to seriously consider the consequences of having all your eggs in one basket. Whether you are investing at home or oversea, make sure to diversify.

If you are not diversified across foreign markets and currencies than you just aren't diversified. It's that simple. When your real estate is on US soil, your cash is in USD, and 20% of your equities are abroad, you are not diversified. You have all your eggs in the USD and US market. And for better or worse you have a huge home bias.

Take for instance, that you can get a 6% return having money in an Aussie bank account right now. Where are you going to get a guaranteed 6% anywhere else. While their could be significant movement in the AUD if we fall deep into recession, all you have to ask yourself is whether the AUD is going to stay relatively the same or rise against the USD in the long term. And, even if it loses a little to the USD, 6% yearly can offset the losses pretty quickly. Again, wouldn't put all your money there, just one of many options people should be looking at to diversify with their money.

crashdamage1957 --

Ok. Just wanted to be sure I understood what you were saying. :-)

I don't disagree about home bias and diversification. At the very least though, the US market has laws and regulations in place to provide some information about our companies and funds (such as prospectuses and 10Ks), whereas in other markets, they may or may not.

Plus, other markets may also be prone to more government interference or local instability.

But I guess the biggest reason is that I can only read English, thus the home bias to be invest in things I can only read about and understand. For other investors that are able to read other languages, then that's a different story for them.

Depending on how you invest, having a home bias isn't necessarily a bad thing, but all things being equal, I agree that we should remain diversified and not over-weight any particular asset class or markets, at least not without some research.

Everyone uses the word 'diversification' yet no one has an ability (and/or desire) to discuss exactly what that means. What kind of risk have you mitigated by owning x% international equities? You might have added risk without increasing expected returns! Example-"I own the DOW and an International fund" -Those assets might have less diversification than you would think. And owning the market (through SPY etc) is not diversification, its owning the market.

A very nicely written and accurate article.
Coincidentally after we arrived home last night from a nice Mexican restaurant that is hurting for customers these days, where thanks to a coupon, one of our meals was only $2.99, we started talking about the causes of the current economic crisis. As we were preparing to go to bed I looked at every item I was wearing including my socks, shoes, underpants, pants, shirt, and belt. There wasn't a single item that was made in the USA even though most of the brands were American, and my wife's story was the same, also both of our automobiles were made in Germany.
It's no wonder that over 8 million Americans are unemployed and our government and state finances are being drained by extended unemployment benefits, food stamps, welfare, medicaid, stimulus bills, and all of the other assistance programs that so far have been unable to turn the economy around.

As I see it the big problem is that we are not the Producer nation that we used to be. Another example, I bought a new energy efficient LED - LCD flat screen Westinghouse TV yesterday at Costco - guess where it was made - China of course.

All of those great well paid union jobs of old have disappeared, never to return. That is why the balance of economic power in the world has shifted dramatically and why the trend is not in our favor and unlikely to change.

The last two paragraphs in the article are correct in that investors need to rethink their investment opportunities. Personally I just don't trust anyone else to manage our money. It's not that there aren't good financial advisors out there but we each have unique circumstances and if you can possibly manage your own finances that's definitely the way to go. However managing your own finances means staying abreast of what is happening in the global economy by reading lots of reports and newsletters written by people that are experts in these matters. Then, in order to make intelligent investment choices you need to have all the data available that will allow you to find the investments that are tailored to your needs in terms of "Annual rate of return", "Volatility", and "Worst possible drawdowns" over past periods ranging from the last 1,2,3 months to the last 1,2,3 years before constructing a portfolio that will meet your objectives. That cannot be done without software that can sift through and examine the data under your direction to find what you are looking for in each particular asset class that you are interested in. After that, your job isn't over, your investments have to be monitored very frequently and changes will often be required if you are to stay on track. That's a very tall order for busy working people with families. The only other choice is to obtain advice from someone you trust to tailor a portfolio for your special needs and to then stay on top of it as events change with time - that's also far from easy as well as probably being expensive, and maybe being unreliable. Choosing a good investment advisor is far more difficult than choosing a good doctor or dentist.

Tyler, diversification is simply the mixture of different types of asset classes that have low correlation to one another. Basically, since we can't predict the future, the next best thing here is to NOT put all of our eggs in one basket.

But you do have a point. I too don't see how tilting 5% or 10% more towards international investments will necessarily improve our diversification strategy. Clearly, this author is not suggesting that. Quite the contrary, (s)he believes, by some reasonable assumptions about the future, that some non-US markets will probably out-pace the growth of the US market, and therefore, we should put more money into those markets.

To re-cap my argument:

1. Even if is a reasonable assumption about the future, it's still an assumption, not gospel truth. Therefore, the message should be taken in the proper context.

2. The author does not suggest diversification as the solution, whereas I do. (In fact, the article originally suggested Forex and commodities trading in foreign markets.)

3. The author has also cherry-picked dates that made his case by showing the US market at his worst light during this recession.

The bottom line is that this is one of the most insightful and articulate piece of spam that I've seen in a long time. As my grandma use to say, the best kind of lies are the ones that contains half truths. I agree with the problem (and most spams and diatribes are correct about stating the problem), I just don't agree with the solution. Fortunately, FMF already cut the latter parts out.

Eugene:
While all predictions of the future are assumptions and not the gospel truth, I have always believed that trends are valuable. There is an old saying in the investment community that, "The trend is your friend". I believe in trend following and when the trend changes against any of my positions I don't waste any time liquidating that position completely and moving into something else with a solid upwards trend that is still favorable. I made such a mutual fund sell yesterday and did the buy of another fund today.

Annualized rate of return
==================
....................1m......................2m......................3m......................YTD
Fund A.........1.97%................7.62%.................8.17%.................11.36%
Fund B.......33.61%..............25.04%................16.54%.................15.03%

The data show clearly that Bond Fund A which I sold is losing momentum and Bond Fund B which I bought is gaining momentum. I often fall out of love with a fund as fast as I fall in love with it. I bought Fund A 3 months ago.

I don't disagree Old Limey, but I believe you've stated before (and here as well) that you trend bond funds, which I can only assume is much more trendable than stock funds.

Nevertheless, as I've stated before, even with stocks, you can make some reasonable assumptions, and trend from there. But again, my point is to do your homework. Otherwise, diversify. But really, it's best to do a little bit of both.

Eugene:
I used to use momentum investing to trade equity funds but gave it up for two reasons.
1) My portfolio reached a size where the daily volatility was becoming more than I could stomach. Maybe that's why the volatility index that I use is called the Ulcer Index (as named by its originators Martin & McCann, graduate students of Nobel Laureate, Professor Sharpe of Stanford University who developed the Sharpe Ratio).
2) It also was at a size where I had lost the the urge to keep it growing strongly through difficult markets and was ready to move to the slow lane. As it happened I picked a good time to do it, November 2007, when the (Up-Down Volume) and (New Highs-New Lows) summations for both the NYSE and the Nasdaq were heading downwards very convincingly and making a descending pattern of lower highs and lower lows - not want you want to see.

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