Large banks are way down in the past 12 months, and as a consequence their trailing yields are well above normal.  That potentially creates substantial long-term equity income opportunity, but the big question is whether the dividends that make those yields will hold or be cut.

If you subscribe to the “buy it when it’s cheap” philosophy, then you really need to evaluate any sector when it sinks the way large banks have done.

If you conclude that taking a position (partial or full) in large banks is the right thing to do, we believe that you should buy the sector, not individual banks (unless you have high research-based conviction about the individual company).

If you buy the sector, you are exposed to systematic risk for banks (general market risk and industry specific risk, such as more mortgage market trouble).  You would probably hold …

Large banks are way down in the past 12 months, and as a consequence their trailing yields are well above normal.  That potentially creates substantial long-term equity income opportunity, but the big question is whether the dividends that make those yields will hold or be cut. 

If you subscribe to the “buy it when it’s cheap” philosophy, then you really need to evaluate any sector when it sinks the way large banks have done.

If you conclude that taking a position (partial or full) in large banks is the right thing to do, we believe that you should buy the sector, not individual banks (unless you have high research-based conviction about the individual company).

If you buy the sector, you are exposed to systematic risk for banks (general market risk and industry specific risk, such as more mortgage market trouble).  You would probably hold some stinkers in the group, but you would also hold

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We believe it is important to look at return and volatility risk in both absolute and relative terms. For relative performance, we think the 10-year US Treasury bond is a good base to use, because is it relevant to all asset classes.

It relates as well to stocks as to bonds, to real estate, to commodities or to just about any asset class.

Tables of numbers have their place and use, but we also believe a picture is worth a thousand words. We try to put important data into visual formats to make it easier to see meaning. Some people do better with numbers in tables and some do better with pictures. Here is our way of visualizing risk adjusted return.

We call our proprietary way of calculating returns and volatility relative to government bonds “Treasury Indexed Quotients (TIQ)”, a registered trademark.

Each month, we calculate the TIQ for

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Okay, this Calendar Options thing sounds great, right? Yeah, we think it does. Later in this post we’ll tell you how Calendar Options is going to work—but before you go out and open up half a dozen 10-contract positions, there are a few things you need to know, at the very minimum, about trading calendar spreads. Even though they resemble iron condors in some ways, those longer-expiration options lead to some very important differences: Calendar spreads are almost always net-debit trades, which means that we won’t have as much cash sitting in our account earning interest. . .but at current rates, that’s kind of a joke anyway. Because calendar spreads have less distance between the break-even points, adjustment is an important part of the strategy. In our view, this is a plus, because we can change the profit curve of a ...

Investors should think about volatility as well as mean returns when planning and analyzing their portfolios.

If we could remain investors for long periods, and did not need to take money out for any reason, then volatility would be of less concern. However, the shorter the time horizon for expected withdrawals, the more important volatility (return standard deviation) becomes.

Standard deviation is an important factor in the retiree question; “Can I outlive my money?”

Proper allocation among asset classes in light of volatility is a critical aspect of portfolio design for investors who have changed, or are about to change, life stages from accumulation of assets to consumption of assets.

Real world distribution of investment returns is not so perfectly symmetrical as in the diagram below, but that “normal” distribution “bell curve” is the basis of portfolio theory about volatility risk, measured by standard deviation of returns.

Actual distributions for overall markets

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