Real Answers To Real Questions

4/3/2017


Even longtime subscribers to Dow Theory Forecasts often ask questions that surprise us.

At times we, like most people, suffer from being too close to our own work to recognize areas of confusion. That means we receive queries about issues we didn't realize were a problem — until someone asks. In this story we'll shares our answers to some actual reader questions. Hopefully, our answers will help you make better use of the newsletter.

Q Why don't you explain your Quadrix system better? I'd like to see a detailed explanation of each of your factors.

A Not every reader wants to get deep into the guts of our stock-rating system. If you want to find out more than what we mention in the newsletter, visit our website at www.DowTheory.com. Use the Quadrix Tools link in the green bar at the top of the Subscriber Area main page. There you'll find a brief overview of Quadrix. For more detail, click on the Quadrix Explained link near the upper left corner of the page.

Q What's the difference between your Overall and Reranked Overall scores?

A Our Reranked Overall score is one of two sector-specific Quadrix scores we compute, along with the 12-Factor score. While traditional Quadrix scores rank stocks relative to nearly 5,000 others, the sector-specific scores rank stocks relative to only the other stocks in their sector. You can find these scores at www.DowTheory.com/Go/Sectors For the Reranked Overall, we use the same six categories from the traditional Overall score — Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance — but weight them differently to accommodate how well each category works in a given sector. We talk about the Reranked Overall score periodically in the newsletter, and most of the time we explain how it works.

Q Why do you offer "our stock portfolio plus cash" guidance for asset allocation? That seems out of touch with modern portfolio treatment, which recommends holding a variety of asset types.

A We have never advised readers to simply hold our stocks and cash. Many times in our commentaries you'll read something like "for the equity portion of your portfolio." Just about every investor should keep at least a portion of his portfolio in fixed income.

However, such asset allocation is out of our purview, in large part because there is no one-size-fits all strategy, which means we can't offer specific guidance about the percentage of a portfolio to hold in stocks versus fixed income. We talk about asset allocation from time to time but write few stories on it because a mass-market approach can do more harm than good.

How much fixed income you should own depends far more on your personal financial condition than on anything we could write in a newsletter. However, we do offer some assistance in this matter on our website. Visit our Asset Optimizer available at www.DowTheory.com/Go/Assets. Or you can find it in the Tools & Resources section of the Subscriber Area page.

When we mention a cash or short-term bond position, we're referring to the allocation for the equity portion of portfolios. Most of the time, we advise subscribers to hold at least a small amount of cash, and that percentage rises when we sour on the market's appeal.

For example: At the moment, our Long-Term Buy List has 6% in a short-term bond fund as a defensive measure. That means an investor with a $500,000 portfolio who keeps half of her money in fixed income should own $250,000 in bonds or bond funds, $235,000 in our recommended stocks, and $15,000 in the Vanguard Short-Term Corporate Bond ($80; VCSH) exchange-traded fund. We use the ETF as a substitute for cash, since cash itself provides almost no return in today's market.

Q Right now you are bullish, recommending we hold at least 94% of equity portfolios in stocks. But when you recommend a move to more cash, do we raise the funds by selling small pieces of each stock? Or do we sell entire positions?

A There's no single right answer to this question. Our cash position will change every time we buy or sell a stock. In many cases, we end up adjusting our cash position via rank changes. But sometimes, if we decide to make a quick, large change in the cash position, we'll adjust the target weights of the stocks on our recommended list. In the latter case, you'll have to rebalance if you wish to follow our cash position.

So the answer to your question is, we might raise cash by selling two or three stocks at once, or we might do it by lowering our target weights. When the time comes to rebalance, we have historically advised readers to start the cash-raising by peeling back their larger positions.

Q How many stocks does each portfolio hold, and what is the average price and number of shares for each holding?

A We don't set specific stock counts for portfolios, allowing greater flexibility for buying new stocks or selling those on the list without the need to make a complementary move. At the moment, our Focus List contains 14 stocks, our Buy List 30, and our Long-Term Buy List 34. In general, you can expect the Focus List to hold 12 to 20 stocks, the Buy List 25 to 35, and the Long-Term Buy List 30 to 45.

We don't recommend specific share counts for individual positions. Instead, we use target weights. For instance, if you followed the Buy List, you'd hold 3.1% of your funds in Alaska Air Group ($94; ALK). That might be eight shares or 800, depending on the amount you choose to invest.

Q What is included in a subscription to Dow Theory Forecasts?

A With the subscription you receive a weekly newsletter, which includes a monthly Monitored List supplement and a quarterly Utility Update. You'll also receive unlimited access to our website, which features many analysis tools — way more than most people choose to use. But if you like to do your own analysis, our site is loaded with data you can study.

We also provide daily online copy, which includes twice-weekly hotlines that provide our latest take on the market, as well as present any rank changes. That's not to mention all the free research reports, financial-planning tools, and mutual-fund information.


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