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Life after SLO2 - Part 1
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In the last days of StrategyLab 2 I dumped UDN (short the dollar) which inexplicably had not been growing as much as I thought it should lately, and bought FXF (long Swiss Franc) in its place. During the final days, the stock market went down and my bear-market ETFs went up so that they exceeded the 25% ETF limit. When trimming down to remain in compliance, I sold all the FXF because I really didn't understand why it had been doing so well and wasn't sure the trend would continue. After reading today's article at MoneyAndMarkets.com I understand the situation a little better. Per Jack Crooks, one of the article's writers, "When a crisis shows up anywhere in the world, investors have traditionally rushed to the relative safety of the Swiss franc because of Switzerland's role as a safe haven in a time of turmoil.... Plus, the Swiss central bank still has a very large reserve of gold relative to other major countries in the world. But the clincher is the Swiss carry trade.... Step 1. Investors borrow Swiss francs at very low interest rates. Step 2. They convert the Swiss francs into U.S. dollars, British pounds and other currencies. Step 3. They take that money and buy high-yielding, riskier investments. That's what's called the Swiss franc carry trade. Now, let me show you what's likely to happen next ... First, the risky investments start going sour -- because real estate is collapsing, or stocks are falling, or banks are failing, or some combination. Second, these investors get scared. They suddenly want to get rid of their riskier investments. So they sell. Third, they rush to buy back Swiss franc to repay their loans. And when they rush to buy Swiss francs, naturally, they drive up the value of the Swiss franc." Looking at the early market figures, I saw stocks were up and FXF was down again (as were other bear ETFs) so I bought it back, with the intent of holding it longer-term this time. When the market resumes the bear trend and my ETFs go too far up again, I'll have to decide where to trim in order to stay under 25%. But I can put off that decision for now. With StragegyLabOpen 2 at an end, I can take a little more time and concentrate on optimizing the fund for longer-term performance at Marketocracy. | ||
