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The Leap Year Approach To Investing

This year (2016) marks another special year for those who happened to have a significant event, like a birthday or wedding anniversary, fall on February 29th. The Leap Year, which is that extra day that we get every 4 years to help align our calendar year with an actual solar year (which happens to be 365.25 days), is upon us yet again. While many of us might just see this as just “another day,” there are some real advantages to having four-year intervals in our lives. We propose that one of them is looking at your investment performance, assuming you are in a target date fund or have a passive advisor handling rebalancing, tax-loss harvesting and a glide path strategy for you. Now this might sound a bit loony, but there is some real truth into what we are proposing. First of all, it allows investors to drown out the daily “noise” that the prognosticators, the “professionals,” and the entertainers are delivering across the many media outlets. These outlets have become experts in delivering second by second accounts of random news stories and extrapolating them into “advice” with an overlay of overconfidence, as if their ability to estimate market values and future events has the same precision as a Swiss watch. Unfortunately, many soothsayers are more often wrong than they are right , but the short-term attention and amnesia that affects all of us humans allows us to forget and repeat. Once we take a big step back from the second by second clutter, we are able to take a deep breath and really see the irrelevance of it all. A Leap Year approach to investing is the embracing of this emancipation. Now there is nothing unique to this approach in which we are trying to find some long-term market-timing trend that will allow you to outperform the market. Quite the contrary! This is about resetting your internal investment clock to be thinking in years — many years, that is — instead of seconds. It could have easily been the 10-Year High Reunion approach to investing or a welcome to a new decade approach to investing. But let’s be reasonable. At the end of the day, what we are really talking about is the benefit of time diversification. So what does this actually look like? Let’s assume that an investor decided to start investing back on March 1, 1928 and made an agreement with their investment advisor to not discuss nor look at any performance figures until February 29th of the next Leap Year. May seem very unrealistic, but not as much as one would think. Unless something dramatic changes in somebody’s financial situation (this does not include fear due to a short-term downturn in the market), then it doesn’t seem so unrealistic that a 4-year window to chat and reassess could be practical. There may be things going on in the background like rebalancing and tax-loss harvesting, but we are just talking about looking at performance and reassessing financial goals. Using historical performance data for IFA Index Portfolio 100 from March 1, 1928 through February 29, 2016, we have 22 independent 4-year time periods ending on a Leap Year (see table below). We know that past performance is no guarantee of future results, but we are going to be speaking more about the overall trend versus specific numbers. For example, over all 22 4-year periods, the average 4-year annualized return was 11.50%. The lowest 4-year period was during the Great Depression (1928-1931) where we saw an annualized return of -23.50%, or a painful total loss for the 4 years of 65.74%. This was subsequently followed by the highest 4-year annualized return (1932-1936), where we saw a 32.48% annualized return, which amounts to a total return of 208.06%. This would have gotten an investor back to the original investment amount from March 1, 1928 (8 years earlier). The third lowest Leap Year annualized return ended on February 29, 2012, which included the global financial crisis of 2008-2009, but still ended up with a 12.6% total return for the period. Let’s digress on this just a little bit. If we were to focus on the day-to-day news stories and volatility during that time, which included the fall of Bear Stearns and Lehman Brothers as well as the bailout of the biggest financial institutions in the world, like AIG, and the economy had lost 800,000 jobs per month, we would have expected a much different story. It was a warzone. But once we expand our view, even during a very distressing time like 2008, it was just a blip. Out of the 22 independent Leap Year periods, there were only 2 (9%) that had negative returns (both in the 1928 to 1940 period) and no negative Leap Year period returns since 1940. Leap Year Returns of IFA Index Portfolio 100 88 Years (1/1/1928 to 12/31/2015) 22 Leap Years 4-Year Leap Year Periods Annualized Return Total Return March 1, 2012 – February 29, 2016 6.18% 27.09% March 1, 2008 – February 29, 2012 3.02% 12.64% March 1, 2004 – February 29, 2008 10.54% 49.33% March 1, 2000 – February 29, 2004 9.82% 45.43% March 1, 1996 – February 29, 2000 12.12% 58.04% March 1, 1992 – February 29, 1996 13.92% 68.44% March 1, 1988 – February 29, 1992 13.82% 67.81% March 1, 1984 – February 29, 1988 22.54% 125.46% March 1, 1980 – February 29, 1984 18.49% 97.09% March 1, 1976 – February 29, 1980 21.46% 117.63% March 1, 1972 – February 29, 1976 3.23% 13.56% March 1, 1968 – February 29, 1972 9.55% 44.05% March 1, 1964 – February 29, 1968 18.29% 95.77% March 1, 1960 – February 29, 1964 9.09% 41.65% March 1, 1956 – February 29, 1960 10.39% 48.49% March 1, 1952 – February 29, 1956 19.22% 101.99% March 1, 1948 – February 29, 1952 18.44% 96.78% March 1, 1944 – February 29, 1948 13.81% 67.77% March 1, 1940 – February 29, 1944 13.32% 64.88% March 1, 1936 – February 29, 1940 -3.14% -11.98% March 1, 1932 – February 29, 1936 32.48% 208.06% March 1, 1928 – February 29, 1932 -23.5% -65.74% Source: ifacalc.com , ifabt.com , Index Fund Advisors, Inc. We could also take a look at the monthly rolling 4-year returns from 1928 to 2015. This would include 1,009 4-year monthly rolling periods. The median annualized return across all 1,009 4-year periods was 13.42%. The lowest 4-year period was 06/1928 to 05/1932, where we saw an annualized return of -36.73%. Similarly to our observation before, the highest 4-year return came soon thereafter (03/1933 – 02/1937) where we saw a 56.22% annualized return. Click to enlarge Click to see the full interactive chart on IFA.com . The Leap Year Review approach to investing is our way of resetting our investors’ internal investment clocks. Investing is not about thinking in seconds, minutes, hours, days, weeks, months, or even 4 years. There is too much randomness to extract anything of benefit from these types of time periods. Having a broader focus allows investors to tune out the irrelevant. This will help to protect investors from becoming victims of their own emotions. We have shown using historical data the benefits of time diversification . Of course this doesn’t mean that the future will be so bright, but remember, from 1928 to 2016 there have been multiple wars, conflicts, economic booms and busts, stagflation, and differing economic policies (think FDR versus Ronald Reagan). Through all of this, markets have rewarded the patient investor. Believing that somehow this is going to change in the future is pure speculation. Happy Leap Year! Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

NIRP Crash Indicator’s Sell Signals Very Reliable For April 2016

The NIRP Crash Indicator’s signals were very reliable during April 2016. April was the first month in which the signal fluctuated since it became operational on March 1, 2016. In the ensuing days after the reading was elevated to a pre-crash or crash imminent Orange warning from its Yellow cautionary readings on April 1 and April 28, 2016, the volatility of the markets was immediate. In both instances, the S&P 500 experienced declines of 1.2% or greater in four days or less after the Orange signals went off. Since the NIRP Crash Indicator is still reading Orange, meaning that a crash could be imminent and market volatility has not yet abated, the probability of a sudden crash occurring remains high. The NIRP Crash Indicator was developed from research conducted on the Crash of 2008, which revealed the metrics that could have been used to predict the Crash of 2008 and its V-shaped reversal off of the March 2009 bottom. See my Seeking Alpha “Japan’s NIRP Increases Probability of Global Market Crash” March 4, 2016 report. The metrics are now powering the indicator. Information about the NIRP Crash Indicator and the daily updating of its four signals ( Red: Full-Crash; Orange: Pre-Crash; Yellow: Caution; Green: All-Clear) is available at www.dynastywealth.com . Throughout the entire month of March, the signal for the NIRP Crash Indicator had remained at the cautionary Yellow and the S&P 500 experienced little volatility as compared to the extremely volatile first two months of 2016. For the month of March, the S&P 500 increased by 4%. The indicator’s reading went from Yellow to Orange after the market’s close on Friday April 1, 2016 . For the following week ended April 8, 2016, the S&P 500 experienced its most volatility since February of 2016 and closed down 1.5% for the week. The signal’s second Orange reading occurred before the market’s April 28, 2016 open. From the Thursday, April 28 open to the Friday, April 29 close, the S&P 500 declined by 1.2%. The S&P 500 (NYSEARCA: SPY ) and the Dow 30 (NYSEARCA: DIA ) ETFs closing at their lowest prices since April 12, 2016 on April 29. The primary metric that I discovered that now powers the NIRP Crash Indicator are sudden increases in volatility for the exchange rates of the yen versus the dollar and other currencies. The significant changes in the yen-dollar exchange rate accurately predicted the crash of 2008, and the recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016 ” Yen Volatility Is Leading Indicator For Market Sell-Offs ” SA post and my video interview below entitled “Yen Volatility Causes Market Crashes”, I provide further details on the phenomenon of the yen being a leading indicator of market crashes. The only logical conclusion I could come up with for yen volatility or significant appreciation versus the dollar being a leading indicator of crashes is because the Japanese yen and the U.S. dollar are the world’s two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar — by far the world’s most liquid and largest safe-haven currency — is susceptible to dramatic declines until the storm has passed. Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world’s second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan’s. From my ongoing research coverage of the spreading negative rates and the devastating effect that they could potentially have on the global banking system, the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by 2018 at the latest. My April 11, 2016 article entitled, “Negative Rates Could Send S&P 500 to 925 If Not Eliminated” , provides details about the potential mark down of the S&P 500 likely being in stages. I highly recommend you also watch my 9 minute, 34 second video interview with SCN’s Jane King entitled “Why Negative Rates could send the S&P 500 to 925”. In the video ,I explain the math behind why the S&P 500’s declining to below 1000 may be the only remedy to eliminate the negative rates. The video also reveals some of my additional findings on the crash of 2008. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Should You Hedge Your Foreign Currency Exposure?

Click to enlarge By Remy Briand, Head of Research, MSCI The volatility of currency has increased in recent years as a combination of quantitative easing and currency wars fuel swings in the foreign-exchange market. CURRENCY RISK TO EQUITY PORTFOLIOS HAS TICKED UP SINCE THE 2008 FINANCIAL CRISIS The chart above shows that the risk to a U.S. dollar-based investor from currencies in international equity exposure has increased significantly since the global financial crisis, according to the latest Barra global equity model . By contrast, the exposure to foreign currencies reduced total risk for a portfolio of developed market equities at times prior to 2004. Many money managers disregard the volatility and leave their exposure to foreign currency unhedged. Or they apply full hedge strategies that can prove costly over time. A more dynamic hedging approach demands a framework to decide which currency to hedge, a mechanism to monitor the indicators and an ability to vary automatically the portion of each currency weight to hedge in a given period (a proportion referred to as a hedge ratio). Which indicators to consider when selecting a hedge ratio There is a long history of research by academics and practitioners who have studied currency hedging strategies. As part of MSCI’s research into risk factors, we have reviewed and modeled those indicators that have proved to be effective in the literature and over time. Our indicators come from four categories: value, momentum, carry, and volatility. The value indicator measures the relative purchasing power of each currency in a pair. Momentum examines currency returns for the previous six months. Carry measures the difference between two-year sovereign yields for both the foreign and home currency. Volatility compares average monthly volatility with the six-month historical average. The ability to hedge foreign exchange risk systematically for any pair of currencies by reference to the four indicators form the foundation of the approach to adaptive hedging that MSCI introduced recently. Though you can view each indicator individually, together they indicate whether or not to hedge and by how much. If the signal points to a possible depreciation of the foreign currency against the home currency, then a hedge may make sense. The chart below illustrates the calculation of the hedge ratio for the Japanese yen from the perspective of a U.S.-dollar based investor. The solid bands of color show periods when an investor should have hedged yen exposure for the respective indicators. INDICATOR SWITCHES AND THE ADAPTIVE HEDGE RATION SINCE MARCH 2012 FOR THE JAPANESE YEN (U.S. DOLLAR-BASED INVESTOR) Click to enlarge Taking the pain out of hedging decisions If you consider each currency represented in the MSCI ACWI Index, calculate the hedge ratios and average them in proportion to the weight of the currency in the index, you get the global average hedge ratio for home-based investors. According to the formula, a U.S.-based institutional investor would need to hedge its global equity allocation by 65% on average, as of March 31. Based on the adaptive hedging methodology, a U.S.-based institutional investor would hedge 75% of their Swiss franc exposure, 50% of their yen exposure, 75% of their euro exposure and 75% of their sterling exposure. Similarly, an investor based in the eurozone would hedge 75% of their Swiss franc exposure, 50% of their yen exposure, 75% of their sterling exposure, and 50% of their U.S.-dollar exposure. HEDGING RATIO FOR KEY CURRENCIES (AS OF MARCH 31) Because the targeted hedging ratios change through time, currency hedges require active monitoring and regular adjustment in portfolios. While long-term investors may decide to leave their allocations to global equities unhedged, investors more sensitive to short-term volatility may prefer a more rules-based form of currency hedging. The adaptive hedging methodology illustrates one approach based on four factors affecting currency behavior. Further reading: The MSCI Adaptive Hedge Indexes: Flexible hedging using a combination of currency indicators Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.