Kinetic Financial Investment Strategies

Volatility - No Rhyme or Reason

noreply@blogger.com (Ramesh Agarwal & Team) — Sun, 16 Nov 2008 09:39:00 +0000

The market volatility is at unprecedented levels. For our personal and client portfolios, we're recommending a market exposure of about 30%. This way, even if the market goes down another -50%, the loss in your personal portfolio will only be about -15%. On the other hand, if the market rebounds, you'll have enough meaningful market exposure to take advantage of the recovering market and can increase your market exposure along the way. Please remember, nobody can predict the bottom of the market. Our model portfolios are meant to model the equity portion of your portfolio. We need to keep the model portfolios almost entirely invested in the market at all times to compete with the indexes over short time periods (otherwise excess cash would cause a drag on the performance in a recovering market). If you look at our September recommendations, we bought SPY (S&P 500) and EFA (international market) to keep exposure in the market in case of a market rally but with a bearish outlook. In this type of market environment, it is difficult to screen for new funds because there is no rhyme or reason to the market. You can't make smart decisions because the market is completely irrational. There is a daily tug of war in the market between fear and greed. The funds we have in the model portfolios are good and we are watching them on a daily basis. In general, the volatility index (VIX) must go down before rational decisions can be made in the market. Until that time, there is a 50% chance that any fund (or the market) will go up or down on a daily basis. Therefore, we are holding our positions with less activity at this time until the market volatility diminishes and we can make rational assessments of the funds we own compared to all the other funds that exist in the marketplace. Please keep communicating and feel free to send us an e-mail if you have any questions.

Bear Market Rally

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 21 Aug 2008 08:16:00 +0000

At Kinetic Financial, our philosophy is to identify emerging market trends and incrementally build positions in funds that demonstrate market leadership. In making our selection, we carefully weigh a fund's risk/reward profile over several time periods, including the past few months to a year or more. In assessing risk, we typically look at a fund's worst case drop (maximum drawdown) over last 1 to 3 years, as well as intermediate drops. To safeguard against a sharp reversal in trend, we make a small initial investment and then small increment investments as the upward trend of the fund persists. When the leadership trend reverses and the behavior of the fund changes, we incrementally reduce our position and update the fund recommendation accordingly (i.e. from Accumulate to Hold, then to Reduce, and finally to Liquidate).

This strategy works well with general market stability as we have seen during most periods in the past several decades. During a prolonged bear market, we protect a portfolio by tagging weak funds with a "Reduce" or "Liquidate" recommendation and we incrementally sell our weakest positions in the Model Portfolios. When a rally occurs, we reinvest the available cash in funds that emerge with strong Risk/Reward profiles (funds tagged with a recommendation of NewBuy or Accumulate). However, it typically takes time for a new trend to emerge and, therefore, we will tend to underperform the broad market during the initial part of the market rally. As the rally continues, we tend to catch up and surpass the broad market indexes by investing in funds with high alpha.

The market is currently going through rapid sector rotation. Money is moving from sectors that have over performed during the past several years to sectors that have underperformed. In a dramatic market divergence, over the last one month, several sectors/funds are up 10% to 20% while at the same time, some sectors are down 10% to 28% over the last 1 month. Financials, real estate, small caps, value funds, and the US Dollar, have dramatically rallied the past month but were underperforming during the preceding one year period (7/15/07 to 07/15/08). Over last 1 month, precious metals, energy, Latin America, Russia, utilities, and the Euro are down a lot but demonstrated market leadership over the preceding one year. This dramatic reversal happened on 7/15/08 - the day broad based US indexes reached a bottom. The broad US market is up significantly since that date while global markets as well as some leading sectors (energy, gold, utilities, and emerging markets) are continually making new lows.

We believe that the current rally in the US market is a bear market rally and cannot be sustained. The gains we've seen in the US are from sector rotation and not from sustained growth in the market. For a sustained market recovery to take place, most segments of the market have to recover at the approximately same time (although in different magnitudes). This has not happened in last one year.

In this schizophrenic market, it may appear that we buy funds at their peak and sell at their bottom; however, we only start with small positions. Therefore, if a small position quickly reverses trend and we bought at the top and sold at the bottom, the overall portfolio does not suffer significantly. Our objective is to make money on those few funds that demonstrate high performance over a longer period of time (12 to 24 months or more) where we incrementally build a significant position.

In this market climate, we continue a defensive posture. This will hurt us in the short term if the market rallies, however it will help us if the market declines further. We do not make decisions based on one month trends. Rather, we judge the Risk/Reward characteristics of a fund over the last few months, over 1 year, and the past several years to determine if it should have a "NewBuy" or "Accumulate" rating and be added to a portfolio.
Be patient; be defensive; watch the market; and capitalize on fruits of a sustained market recovery, whenever it may occur. The market always recovers, and that's the best opportunity to make money...

Portfolio Management Metrics

noreply@blogger.com (Ramesh Agarwal & Team) — Tue, 29 Apr 2008 06:32:00 +0000

Last week we discussed some key concepts in personal portfolio management.

The three most important metrics to track for your personal portfolio are:

What was the peak value of your liquid portfolio?
What percentage have you dropped from your peak?
What is your equity exposure (total equity value divided by total portfolio value, including cash and bonds that are held to maturity)?

If you are dropping too far from your peak past a certain threshold for normal market volatility, say -5%, perhaps it's time to incrementally reduce your equity exposure to reduce your risk and protect your assets from an extended bear market. You can reduce your equity exposure by selling your funds with a "Reduce" or "Liquidate" Kinetic Financial recommendation. The rate at which you reduce your equity exposure relates to your personal risk tolerance.

Similarly, if your total liquid portfolio is increasing from its bottom (past a certain threshold- say +5%), perhaps it is time to increase your equity exposure by buying funds in the best areas of the market from a Risk and Reward perspective. You can increase your equity exposure by buying funds with an "Accumulate" or "New Buy" Kinetic Financial recommendation.

This strategy will help you make money in the best areas of the market during *sustained* market upturns and protect your assets during an *extended* bear market.
As we discussed previously, the Kinetic Financial Model Portfolios are tuned to assume "market" risk as defined by the S&P 500. If you are willing to accept this level of risk for your portfolio, you can follow the model portfolios exactly.

Regardless, we believe it is very useful for everyone to track their portfolio using the three simple metrics described above.

Managing Risk in Your Personal Portfolio

noreply@blogger.com (Ramesh Agarwal & Team) — Wed, 16 Apr 2008 00:01:00 +0000

As you already know, the market has been in a steep decline since last October. During this time we have managed risk by reducing our exposure to underperforming funds, especially in Small Cap and International markets. Weighing the risk of a further market drop against the risk of missing out on a big rally, we have increased our exposure to better performing funds, especially in Consumer Staples, Utilities, and Large Caps.

It is important to realize that the Kinetic Financial Model Portfolios must be predominately invested in the market at all times in order to compete with the broad indexes during short time frames. In other words, the Equity Exposure of the Model Portfolio (total equity value divided by total portfolio value, including cash and bonds that are held to maturity) must always be close to 100% in order to complete with the indexes during 3-month, 6-month, and 12-month time frames, especially during market rallies.

Since the Kinetic Model Portfolios are almost always invested in the market, it will have market risk characteristics which may be undesirable to the investor from a risk tolerance perspective. For example, the S&P and the Kinetic Financial Model Portfolios lost about -18% from their peak in Oct 2007. Taking on this much risk may not be suitable for an investor depending on their risk tolerance.

For this reason, for our personal portfolios, we very carefully track our Equity Exposure to ensure it is inline with our personal risk tolerance profile. We also carefully track the peak value of our portfolio and the % we have dropped from our peak value. If we drop too far from our peak portfolio value beyond our comfort level, we can reduce risk and Equity Exposure by sell selling our weakest positions. On the flip side, if we start making money from our portfolio, perhaps we may be willing to increase our Equity Exposure (and risk) by buying funds in the fast growing areas of the market from a Risk and Reward perspective.

In this way, the Kinetic Financial Model Portfolios help us to manage the equity portion of our portfolio, but this is only one dimension of success portfolio management.

The main point: you may not want to be 100% invested in market the way the Kinetic Financial Model Portfolios are based on your personal risk tolerance.

We will discuss more concepts in portfolio management, equity exposure, and risk management next week.

Be Systematic, Not Emotional about Investing

noreply@blogger.com (Ramesh Agarwal & Team) — Wed, 12 Mar 2008 03:54:00 +0000

On Sunday night we issued a SELL recommendation for MGLBX which was executed at the end of the day on Monday. The market had a sharp rally on Tuesday.

In general, our recommendations are designed to (1) make money during sustained periods of growth and recovery (2) protect assets during an extended market correction. Since we are still in an extended bear market correction, our bias is to protect our assets rather than make money on short term volatility.

Please do not get caught up in the emotions of the market. You could be thinking "Why did Kinetic Financial tell me sell an investment one day before a sharp rally... I've lost money because of their recommendation!"

Smart investment decisions are made by being systematic instead of emotional. Nobody can predict the future. Instead, we react to changes in the market by either selling our weakest assets during a downturn or buying the strongest assets during an upturn. We do not, and will not, make money from short term volatility. Instead, we seek to make money during *sustained* periods of recovery and growth.

Currently, the Model Portfolios are in line with overall market risk. Please track our model portfolio performance statistics over time and you will see that our fund recommendations are valuable. We are confident that our model portfolio performance will be substantially better than overall market indexes over the long run. When the market starts to recover, we will generally under perform in the short term while re-deploy our cash. However, we will generally catch up and surpass the indexes by investing in the strongest areas of the market and in funds that have high alpha.

Please send an e-mail to feedback@kineticfinancial.com if you have any questions.

2007 Kinetic Financial Year End Review... was it worthwhile?

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 03 Jan 2008 07:42:00 +0000

Happy New Year and thank you for your support! 2007 turned out to be a good year for Kinetic Financial. Our Large Model Portfolio returned 11.3% compared to 5.5% for the S&P! On average, the Small, Medium, and Large model portfolios returned 10.9% in 2007.

Our performance will generally be some weighted average of the S&P, MCSI EAFE (International index), and MSCI EM (Emerging Markets index), depending on which of these indexes perform the best from a Risk and Reward perspective. During a shift in market leadership, such as the one we experienced starting in February 2007 (market leadership shifted from Small Cap Value to Large Cap Growth), we will tend to under perform the broad market indexes as we redeploy our investments. However, if market leadership remains stable for sometime (6 months or more), we will tend to catch up and surpass the broad indexes by recommending and investing in funds with high alpha compared to the broad indexes.

So, was all the Kinetic Financial buying and selling activity in the Model Portfolios worthwhile? You could look at any individual fund that we recommend (MMUCX, ADINX, THOIX) and say "hey, I would have done better if I invested all my money in any one of these funds!" Or, you could say "hey, I could have done just as well if I invested all my money in EFA which tracks the international index."

Our belief is... absolutely yes! It was absolutely worthwhile to have the buying and selling activity in the Kinetic Financial Model Portfolios. Why? Here are a few reasons:

1) Hindsight is always 20/20. The question is not "Where should I've put my money 12 months ago to get the best return?" Rather, the correct question to ask is "Given all the information I have today and the state of the market as it exists today, where do I have the highest possibility of making a good return with low risk over the *next* 12 months?" This is why our tag line is "mutual fund recommendations for the prevailing market conditions." We try to determine the state of the world today without making any predictions for the future. When tomorrow comes, we re-evaluate our recommendations to see if the state of the world has changed. Our goal is to spread investments over many high performance funds that appear to have good Risk/Reward profiles. If a fund changes behavior (does not conform to its recent risk and reward characteristics), we sell it. If a fund continues to exhibit the same behavior over time, we continue to accumulate positions in the fund.

2) We reduce market exposure during down markets by selling our weakest positions which protects us from an extended bear market. During the February & July 2007 downturns, we were almost 30% in cash. History has shown us that during person's lifetime, very large market corrections *will* occur. The NASDAQ lost 78% during the 2000 technology bubble burst; during the Great Depression the stock market fell 86% over a 34-month period; and finally, after the 1973-74 market plunge, the market did not recover for more than 7 years. By definition, indexes are always 100% invested in the market. Most mutual funds must remain close to 100% invested in the market to compete with their benchmark indexes during short time frames. Therefore, it is up to us to control our market exposure in the event of an extended bear market. Selling weak positions and adjusting market exposure gives you complete control of your downside risk. For me, knowing that I won't lose my shirt no matter what the market does helps me sleep at night.

3) No single fund can have high performance forever. Good funds tend to have a lifecycle. If a fund has good performance, eventually people catch on and assets are attracted to the fund. Then, the fund experiences asset bloat and the strategies that made the fund successful in the first place often don't work anymore-- the fund begins to behave like the index. Smart fund managers that are not greedy tend to close their funds to new investors to keep assets at manageable levels. So, the trick is to identify high performing funds early enough in their lifecycle before they close their doors to new investors. When we recommend buying a fund, we know that someday we will need to recommend selling that fund because the money will be better elsewhere. We don't know if the behavior of the fund will change in 1 month; 3 months; 12 months; or 5 years. However, we keep this uncertainty in mind and try to invest in funds with low transaction costs and high liquidity.

4) Our portfolio allocation automatically shifts to keep it in line with market leadership. At the beginning of 2007, our portfolios were heavily invested in Small Cap Value funds which have had great run during the past several years. Now, we are mostly invested in Large Cap Growth funds. Small Caps lagged recovery after the February, July, and November 2007 downturns. As a result, we redeployed our cash into the fast growing areas of the market which was demonstrated by Large Cap Growth and International funds.

5) Our model portfolios are scalable to help you manage 100% of your wealth. Yes, you could have made 50% in 2007 if you invested in Google, but would you have invested 100% of your net worth in Google? Even if you use Kinetic Financial to manage millions of dollars, your ownership stake in any single stock will most likely be a fraction of a percent based on the mutual fund stock holdings. This allows for incredible diversification. Also, we provide additional downside protection because we reduce market exposure during down markets.

6) We boil the ocean of funds out there down to a cup of tea. You may think "hey, this fund that I've invested in looks pretty good but Kinetic Financial does not recommended it." Yes, but we are screening almost every fund that exists in the marketplace-- over 17,000 unique fund symbols. If it's on Morningstar, we've screened it. If your fund didn't pass our screening algorithm, it's probably because of its Risk profile relative to its performance weighted more heavily on the most recent market downturns. We will always gravitate toward high performing funds that have demonstrated less risk in the most recent market downturns.

7) If you take $100,000 today with a compounded rate of return of 10%, you'll have $1.7M after 30 years. If you take that same $100,000 today and achieve a rate of return of 15%, you'll have $6.6M after 30 years. It's worth fighting for those few extra percentage points of return every year! That's the power of compounded returns. If you look at our performance track record, you'll see that we generally beat the broad market by 5% to 10% year-over-year. That's with downside protection! Past performance does not guarantee of future returns. However, this year we were able to achieve our personal target performance objective of 5% to 10% over the broad indexes.

Thank you everyone for your support. May 2008 bring you happiness, joy, and sunshine. Please add a comment if you have any questions. Even if you don't have a question, your positive (or negative) feedback would be appreciated.

Sustainable Market Recovery?

noreply@blogger.com (Ramesh Agarwal & Team) — Mon, 27 Aug 2007 05:23:00 +0000

The market appears to have started a recovery. All of the major indexes are up over 5% from their bottom. However, it remains to be seen if this market recovery is sustainable.

The Kinetic Financial model portfolios are currently 25% to 35% in cash to protect us from an extended bear market. As the market recovers, we will incrementally put this cash back into the market by investing in funds that held up well during the most recent market downturn and at the same time have demonstrated good performance.

It is during down markets that good funds reveal themselves. We look for funds that have lost the least amount of money during the most recent market downturn but have still demonstrated high upside potential. If the same issues continue to plague the market in the near future, we'll be better protected by investing in funds that have demonstrated less risk in the most recent downturn.

Be on the lookout for our new fund recommendations as the market recovers. We never make big bets on any one fund. Instead, we incrementally build up positions in funds that continue to demonstrate strong Risk/Reward behavior over time.

How We Got Started

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 05 Jul 2007 03:22:00 +0000

I (Dev Gupta) started really getting into investing in 1999 when I approached Dr. Agarwal (a close family friend) at a party and asked him to teach me his investment techniques. What I learned over the years is that there is a lot of mathematical rigor behind his analysis, and my personal portfolio started to compete with my day job. So in 2005, I decided to try to make a business out of it and was able to get Dr. Agarwal's support.

Our basic concept... don't buy and hold your assets forever. For example, if you used a buy and hold strategy on the S&P500 in March 2000, you would just now be recovering your losses; over 6 years you would not have made a dime (the S&P total return index just recovered in Dec 2006)! Instead, analyze the Risk/Reward profile of your assets on a daily basis, incrementally sell under performers, and reinvest into areas of the market that are making the most money. By reducing market exposure during down markets, we can dramatically out perform the market during an extended bear market and carefully control our risk.

Dr. Agarwal provides the recommendations descriptions that you see. Please contact us if you have any feedback!

Fidelity changes THOIX minimum investment

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 21 Jun 2007 05:28:00 +0000

When we first recommended THOIX on 3/12/2007, Fidelity allowed small investments in the fund ($15K or less) even though Morningstar reported required initial investments of $2.5M or more. Apparently, Fidelity changed their policy on THOIX and now restricts initial purchases to at least $2.5M.

If you invested in THOIX when we recommended it, you're in luck! Existing share holders can continue to purchase THOIX in small increments. However, new investors are restricted to initial investments of at least $2.5M.

As an alternative, we recommend new investors to use the Class C share instead-- THOCX.

Please provide us feedback if you find any issues with the content we are provided on the web site. It is a constant struggle for us to keep up with changing brokerage restrictions, fund closures, dividends, etc. Your help benefits our entire community.

Shift in Market Leadership

noreply@blogger.com (Ramesh Agarwal & Team) — Mon, 21 May 2007 03:24:00 +0000

We have detected a shift in market leadership since the last major market downturn in May 2006. During the past 12 months, Large Caps are out performing Small Caps. Since the Feb 2007 downturn, the performance of Large Cap indexes such as the S&P and Dow have been very strong compared to the rest of the market.

During the last several weeks, the Kinetic Financial model portfolios have lagged the overall market. The Model Portfolios will tend to under perform when there is a shift in market leadership. However, as we readjust our portfolios in funds with high alpha, we will tend to catch up and surpass the indexes.

The big question is whether this shift in market leadership will be sustained. In the coming weeks and months ahead, we will closely monitor the shift in market leadership and prune our portfolios accordingly. We don't try to predict the future. Instead, we incrementally react to shifts in market leadership by buying and selling the appropriate funds.

Fund Recommendations - Choppy Waters

noreply@blogger.com (Ramesh Agarwal & Team) — Wed, 25 Apr 2007 05:32:00 +0000

Here are recommendation changes made earlier this week:

ADFSX Recommendation Change- Reduce:
This relatively new Financial Services fund excellent performance in 2006. However, this year it has been under performing and has shown more volatility. It is up only 1.4% YTD.

ARDEX Recommendation Change- Reduce:
This mid-cap value fund is a low volatility fund. However, it has been under performing its category for last six months.

THOIX Recommendation Change- Accumulate:
This world stock fund is less than one year old. It seems to have average volatility and high performance. It is out performing its peer group. All of its percentile performance rankings are '1'! It is up about 15% YTD and over 40% since its July 2006 inception. This fund has a fund imposed short term redemption fee of 1% if sold in less than one month. It is available at Fidelity with a transaction fee of $75 on purchase and no transaction fee on sale. For all other users, check with your broker.

Fund Recommendation Changes

noreply@blogger.com (Ramesh Agarwal & Team) — Mon, 09 Apr 2007 05:39:00 +0000

Here are fund recommendation changes that were made last week:

DEUFX Recommendation Change- Accumulate:
This European fund was up 44% in 2006. This year, its performance is more average. However, it sees to have lower volatility compared to other European funds. It has a short term redemption fee of 2% if sold in less than 60 days. This fund is available at Schwab as a no load no transaction fee fund. It is also available at Fidelity, however, Schwab has lower short term redemption fees. For all other users, check with your broker. We are buying it at Schwab.

DLS Recommendation Change- NewBuy:
In June 2006, Wisdom Tree started a series of domestic and international dividend based ETFs. These represent the value segment of the market. This ETF represents the International Small/midCap Value segment. This is first of its kind. It is up 9.3% YTD, significantly out performing broad indexes. Please note that in model portfolios, all ETFS are traded near the close of the market.

EWP Recommendation Change- Hold:
The European ETF gained 49% in 2006. During Feb/March 2007 downturn, it dropped 10%. However, now it has fully recovered. If you have not already sold it, hold on to it.

EXWAX Recommendation Change- Hold:
This foreign large cap blend fund has rather erratic performance. It has some very good years and some very bad years. Overall it has lower risk justifying its purchase. During the previous two market drops, it went down less than its peers. Its long term performance rankings are very good. It is available at Fidelity as a no load no transaction fee fund. The minimum initial investment requirement has been reduced to $2,500. For all other users, check with your broker. We are buying it at Fidelity.

FMICX Recommendation Change- NewBuy:
This is a low volatility high performance fund. During the recent downturn, it dropped less than 5%. It is out performing its category and S&P 500. It is up 25.7% over last one year. On the negative side, this fund did poorly in 2005. This class C fund is available at Fidelity but not Schwab. It carries a deferred fee of 1% if sold in less than one year.

GSXAX Recommendation Change- Hold:
This fund had good performance during the bull cycle of last three years. For last three months, it is under performing its category resulting in this downgrade. At present, this fund is closed to new investors.

OBIOX Recommendation Change- NewBuy:
This is a new Oberweis international fund. It has the same manager as our high performance China Fund - OBCHX. During Feb/March downturn, it dropped less than OBCHX. It has recovered all its losses. It is likely to be a high performance diversified international fund. It has a short term redemption fee of 2% if sold in less than 3 months. This fund is available at Schwab as a no load no transaction fee fund. It is also available at Fidelity, however, Schwab has lower short term redemption fees. For all other users, check with your broker. We are buying it at Schwab.

TAVIX Recommendation Change- Liquidate:
For several years, it was a good performer with low risk. However, now for more than one year, it is seriously under performing its category. Almost all its percentile rankings are in high 90's. It is up less than 10% over last one year.

Finding Good Funds

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 22 Mar 2007 19:56:00 +0000

Market corrections give us opportunity to find new funds with good performance which withstand the market downturns better. In this recent correction, we have identified the following funds that held up well during the downturn and demonstrate good upside potential. Most of these funds were recently launched. We are starting to track these funds and will provide formal recommendations if their performance pans out.

ADINX
ANGCX
ATDCX
ATICX
WHGMX

IRA Money is Extra Special Money

noreply@blogger.com (Ramesh Agarwal & Team) — Thu, 22 Mar 2007 06:00:00 +0000

Key Points:

IRA and other non-taxable accounts are extra special because the IRS does not charge capital gains tax when you sell and reposition your investments, increasing the effective compounding rate of return.
If you reposition your investments every 12 months (long term capital gains) and achieve a 12% yearly return, you could withdraw your money from an IRA after 6 years, pay the 10% IRS penalty and still come out ahead compared to a taxable investment account (under the assumptions of Scenario 1). The breakeven date lessens as the capital gains or yearly return rate increases.
If you choose a buy and hold strategy in an IRA, the benefits are questionable compared to a taxable account, especially if your tax bracket does not when you retire after 59 1/2.

Albert Einstein once said, "Compounding interest is the most powerful force in the universe." He should have said, "Compounding tax free interest is the most powerful force in the universe..."

The money you contribute to IRAs and other non-taxable accounts (401K, Roth IRA, etc.) is extra special money. Everyone knows about the tax deferred benefits of IRAs. However, most people don't realize what really makes non-taxable accounts powerful -- no short term or long-term capital gains when you sell an investment in an IRA.

Capital gains taxes reduce the effective compounded rate of return in taxable accounts, which ultimately reduces the overall gain.

So, what does that gobbly gook mean?

Let's consider a hypothetical example. Suppose you reposition all your investments once a year by selling all of your old investments and buying new ones with the strongest Risk/Reward profiles for the prevailing market conditions. You do this in two accounts: (1) an IRA account; and, (2) a taxable account. Suppose you are able to achieve a 12% per year return in each account as a result of your investment activity. At the end of each year, you pay 15% capital gains tax on the taxable account (long term capital gains tax rate). You start out each account with a $10K pre-tax investment with no further contributions. Let's run the numbers...

Scenario 1: 12% appreciation per year; 15% capital gains tax rate; 30% ordinary income tax rate for 30 years; initial $10K pre-tax investment with no additional contributions.

Year	Taxable Account Balance (after taxes)	IRA Balance (before taxes)	IRA Balance (after taxes)	Performance Difference (after tax)
Year 0	$7,000.00	$10,000.00	$7,000.00	-
Year 1	$7,714.00	$11,200.00	$7,840.00	1.63%
Year 2	$8,500.83	$12,544.00	$8,780.80	3.29%
Year 3	$9,367.91	$14,049.28	$9,834.50	4.98%
Year 4	$10,323.44	$15,735.19	$11,014.64	6.70%
Year 5	$11,376.43	$17,623.42	$12,336.39	8.44%
Year 6	$12,536.83	$19,738.23	$13,816.76	10.21%
Year 7	$13,815.58	$22,106.81	$15,474.77	12.01%
Year 8	$15,224.77	$24,759.63	$17,331.74	13.84%
Year 9	$16,777.70	$27,730.79	$19,411.55	15.70%
Year 10	$18,489.02	$31,058.48	$21,740.94	17.59%
Year 11	$20,374.90	$34,785.50	$24,349.85	19.51%
Year 12	$22,453.14	$38,959.76	$27,271.83	21.46%
Year 13	$24,743.37	$43,634.93	$30,544.45	23.45%
Year 14	$27,267.19	$48,871.12	$34,209.79	25.46%
Year 15	$30,048.44	$54,735.66	$38,314.96	27.51%
Year 16	$33,113.38	$61,303.94	$42,912.76	29.59%
Year 17	$36,490.95	$68,660.41	$48,062.29	31.71%
Year 18	$40,213.02	$76,899.66	$53,829.76	33.86%
Year 19	$44,314.75	$86,127.62	$60,289.33	36.05%
Year 20	$48,834.86	$96,462.93	$67,524.05	38.27%
Year 21	$53,816.01	$108,038.48	$75,626.94	40.53%
Year 22	$59,305.25	$121,003.10	$84,702.17	42.82%
Year 23	$65,354.38	$135,523.47	$94,866.43	45.16%
Year 24	$72,020.53	$151,786.29	$106,250.40	47.53%
Year 25	$79,366.62	$170,000.64	$119,000.45	49.94%
Year 26	$87,462.02	$190,400.72	$133,280.50	52.39%
Year 27	$96,383.14	$213,248.81	$149,274.17	54.88%
Year 28	$106,214.23	$238,838.66	$167,187.07	57.41%
Year 29	$117,048.08	$267,499.30	$187,249.51	59.98%
Year 30	$128,986.98	$299,599.22	$209,719.45	62.59%

By the end of the 7^th year, you could withdraw all the money from the IRA account, pay the 10% IRS penalty, and still come out ahead compared to the taxable account. By the end of the 30^th year, the IRA account will have 62% more money than the taxable account. That's the power of being exempt from capital gains tax in the IRA!

The higher the capital gains tax is, the higher the benefit of the IRA. Let's run the scenario again assuming we pay 30% short term capital gains tax (ordinary income tax) at the end of every year and achieve a rate of return of 15%.

Scenario 2: 15% appreciation per year; 30% capital gains tax; 30% ordinary income tax rate for 30 years; initial $10K pre-tax investment to start with no additional contributions.

Year	Taxable Account Balance (after taxes)	IRA Balance (before taxes)	IRA Balance (after taxes)	Performance Difference (after tax)
Year 0	$7,000.00	$10,000.00	$7,000.00	-
Year 1	$7,735.00	$11,500.00	$8,050.00	4.07%
Year 2	$8,547.18	$13,225.00	$9,257.50	8.31%
Year 3	$9,444.63	$15,208.75	$10,646.13	12.72%
Year 4	$10,436.31	$17,490.06	$12,243.04	17.31%
Year 5	$11,532.13	$20,113.57	$14,079.50	22.09%
Year 6	$12,743.00	$23,130.61	$16,191.43	27.06%
Year 7	$14,081.02	$26,600.20	$18,620.14	32.24%
Year 8	$15,559.52	$30,590.23	$21,413.16	37.62%
Year 9	$17,193.27	$35,178.76	$24,625.13	43.23%
Year 10	$18,998.57	$40,455.58	$28,318.90	49.06%
Year 11	$20,993.42	$46,523.91	$32,566.74	55.13%
Year 12	$23,197.72	$53,502.50	$37,451.75	61.45%
Year 13	$25,633.48	$61,527.88	$43,069.51	68.02%
Year 14	$28,325.00	$70,757.06	$49,529.94	74.86%
Year 15	$31,299.13	$81,370.62	$56,959.43	81.98%
Year 16	$34,585.53	$93,576.21	$65,503.35	89.40%
Year 17	$38,217.02	$107,612.64	$75,328.85	97.11%
Year 18	$42,229.80	$123,754.54	$86,628.18	105.14%
Year 19	$46,663.93	$142,317.72	$99,622.40	113.49%
Year 20	$51,563.64	$163,665.37	$114,565.76	122.18%
Year 21	$56,977.83	$188,215.18	$131,750.63	131.23%
Year 22	$62,960.50	$216,447.46	$151,513.22	140.65%
Year 23	$69,571.35	$248,914.58	$174,240.20	150.45%
Year 24	$76,876.34	$286,251.76	$200,376.23	160.65%
Year 25	$84,948.36	$329,189.53	$230,432.67	171.26%
Year 26	$93,867.94	$378,567.96	$264,997.57	182.31%
Year 27	$103,724.07	$435,353.15	$304,747.20	193.81%
Year 28	$114,615.10	$500,656.12	$350,459.28	205.77%
Year 29	$126,649.68	$575,754.54	$403,028.18	218.22%
Year 30	$139,947.90	$662,117.72	$463,482.40	231.18%

By the 3^rd year, the IRA account is 12.7% larger than the taxable account. You can withdraw your money after the 3^rd year, pay the 10% IRS tax penalty and still come out ahead. After the 30^th year, the IRA account will be 231% larger than the taxable account.

The biggest factors affecting the performance of IRA accounts compared to taxable accounts are: number of years of compounding, rates of returns, and capital gains tax rates.

The investment community typically advocates a buy and hold strategy for investors. Ironically, utilizing a buy and hold strategy in an IRA presents a mixed bag of benefits. With this strategy, an IRA can be useful if your tax bracket decreases after reaching the age of 59 1/2. However, withdrawals from an IRA are always taxed as ordinary income. Therefore, investors that buy and hold investments could lose out on a favorable long term capital gains tax rate which is currently at 15%. On the other hand, most investments in a buy and hold strategy will have some yearly taxable events in the form of distributions and/or dividends. These distributions and dividends will not be taxed in an IRA account.

In contrast to a buy and hold strategy, the benefits of an IRA account are clearly evident if the investor is committed to optimizing portfolio performance by selling weak positions and buying strong positions with good Risk/Reward profiles. In essence, the IRA account stops Uncle Sam from dipping his paw into your honey jar every time you decide to sell an investment.

Consider the performance of Dr. Agarwal's track record, which has been representative of the Kinetic Financial investment techniques for the past 8 years. His IRA balance was $74K in 1999. After 6 years of annual contributions totally $16.5K, the account balance grew to $489K by the end of 2004! If capital gains taxes were taken out along the way, the performance would have suffered significantly.

In conclusion, IRA money is very, very, very special money. Take advantage of these accounts every opportunity you have. Don't use the excuse "I don't want to wait until I'm 59 1/2 to access my money." When utilized properly, you can derive tremendous benefit from these accounts, even if you have to access the money early. The sooner you invest, the more you'll personally benefit from tax-free compounded returns.

Too many E-mail Alerts?

noreply@blogger.com (Ramesh Agarwal & Team) — Wed, 14 Mar 2007 21:49:00 +0000

People have asked why we send out so many e-mail alerts regarding our mutual fund recommendations and model portfolio changes.

Here are a few points to help clarify the alert e-mails:

We always provide Model Portfolio changes a day in advance so subscribers have an opportunity to follow the portfolio exactly. We first issue "pending buy" or "pending sell" transactions where the closing amounts are estimated and then we send out the appropriate alert e-mail. The next day we calculate the exact closing amounts and send out another alert e-mail. Therefore, we're sending out two alert e-mails on consecutive days for changes to the model portfolios. In the future, we'll provide an alert e-mail filter that enables you to receive only the pending Buy/Sell transactions and we'll make this the default behavior.
You can set your alert e-mail preferences by clicking on the Membership tab and the E-mail Alerts. Here, you can select which model portfolios and mutual funds you would like to receive alerts on. Or, you can choose a checkbox to receive an alert whenever there is any recommendation or model portfolio change on our web site. You can also specify if you would like to receive our once a week market commentary.
When the model portfolios are 100% invested to the market, each Buy transaction must also be paired with a Sell transaction to free up cash for the transaction. This causes the perception that we're thrashing by getting into and out of the market rapidly. In reality, we're slowly pruning the portfolio to keep it in line with market leadership and funds that provide the best Risk/Reward profiles. All of our fund holding are incrementally built up over time. Large positions in a fund are a result of incremental investments due to strength of the fund's Risk/Reward profile. For example, if we have a $40K position in ARSVX, we may have achieved this exposure using four (4) incremental $10K investments in ARSVX as the Risk/Reward strength continues over time. When the fund underperforms, we use a similar incremental strategy to sell out of the mutual fund.
We also send out alert e-mails whenever a fund provides a distribution, dividend, or closes to new investors. In the future, we'll provide better filtering mechanisms to eliminate these alerts for subscribers who are not interested in this information.

Kinetic Financial has a Voice!

noreply@blogger.com (Ramesh Agarwal & Team) — Mon, 12 Mar 2007 05:40:00 +0000

Kinetic Financial finally has a voice! Thank you everyone for being faithful beta users of our site.

The initial focus of our web site has been functionality. We wanted to ensure the model portfolios, fund recommendations, and daily calculations were solid before launching the web site.

Our next area of focus will be education. We've received many inquiries about the nature of our recommendations and our investment philosophy. We will address these topics in this blog.

Please participate with your feedback. The more questions you ask, the better we'll be able to serve you and the rest of our customers.

Please help us spread the word! Your support will help ensure the success of this endeavor.

Sharp Drop

noreply@blogger.com (Ramesh Agarwal & Team) — Mon, 12 Mar 2007 05:20:00 +0000

The market peaked around Feb 26th and then had a sharp drop. China's index (FXI) went down 21%; China's actively managed funds (OBCHX, OMNCX) went down about 13%; India (MINDX) went down 17%; Emerging Markets (EEM) went down 11%; International Large Caps (EFA) went down 7.6%; Europe (DFE, DEUFX, ESMCX) went down 9%; Real Estate (ICF) went down 14%; US Small Caps (IWM) went down 8%; US Large Caps (SPY) went down 6%. Our model portfolios went down about 7.5%.

When the market starts to go down, we're not sure how far down it will go. To protect our portfolio and reduce our downside risk from events like bubble burst of March 2000, we incrementally reduce market exposure by selling our weak and/or risky positions. A weak position is one that underperformed the up phase of the market and also deteriorated during the down phase of the market (LVOCX). A risky position is one that has dropped too fast from its peak or has the potential to drop fast if the market continues in a downturn (OBCHX, ICF).

Reducing market exposure generates cash. Therefore, we will have a tendency to under perform the broad indexes as the market recovers. As we redeploy our cash into funds with high alpha, we will tend to catch up to the indexes and surpass them as our equity exposure increases.

Kinetic Financial 2006 Year-End Review

noreply@blogger.com (Ramesh Agarwal & Team) — Tue, 02 Jan 2007 06:06:00 +0000

Thank you everyone for your support. We're off to a great start!

We launched the Kinetic Financial Beta site and the Model Portfolios on Oct 1st, 2006.

The Model Portfolios serve three purposes:

Investors can mimic our investment strategies by following the buy & sell transactions in the Model Portfolios.
The Model Portfolios are based on our mutual fund recommendations. The performance of the Model Portfolios compared to the indexes shows the quality of our fund recommendations over time.
The transactions in the Model Portfolio reinforce our mutual fund recommendations. Investors can see the recent transactions in our Model Portfolios to get a sense of what to buy or sell in their personal portfolios.

Here is the performance of the Kinetic Financial Model Portfolios for Q4 2006:

Kinetic Financial Large Model Portfolio: 11.47%
Kinetic Financial Medium Model Portfolio: 12.62%
Kinetic Financial Small Model Portfolio: 13.06%

Here is the performance of various indexes during Q4 2006:

SPY (S&P 500 index): 6.61%
IWM (Russell 2000 index): 8.83%
DIA (Dow Jones index): 7.26%
EFA (MCSI International index): 10.36%
EEM (MCSI Emerging Markets index): 19.64%
Nasdaq Composite Index: 7%

Kinetic Financial builds up positions in Mutual Funds with strong Risk/Reward profiles over time. If the Risk/Reward behavior of a fund changes, we reduce our holdings in that fund in favor of a funds with a better Risk/Reward profile. Consequently, the Model Portfolios will tend to underperform broad indexes during a period where there is change of market leadership (growth vs. value, international vs. domestic, large vs. small, etc). However, the Model Portfolios will tend to catch up and surpass the indexes by investing in funds with high alpha (excess returns), as long as current market leadership is sustained for some period of time.