Why switch securities?

With the October newsletter, we replaced 2 investments – DJP replaced GSC and IYR replaced IFNA.

We made these portfolio changes for two reasons. First, the daily market volume of GSC and IFNA were small enough that the markets for those two securities were not very efficient. The gap between bid and ask prices was relatively large, meaning more-than-usual money could be lost on each buy or sell transaction simply because of how securities transactions work for securities that don’t have a lot of volume.

For example, if you wanted to buy or sell IFNA today, the difference between the market selling price (“ask”) and the market buying price (“bid”) is 3.54%. This is called the “spread” and is the amount of money kept by the company that is handling the market trades of that security. In other words, if you bought IFNA and then turned around and immediately sold it at the “same” price, you would lose about 3.5% because of the spread, not including the commission on the trade that you must pay to you broker. By comparison, the spread on IYR is about 0.02%, so that you lose a lot less money when you buy and sell. The spread is smaller on IYR because the trading volume is much higher, and there are probably several different firms handling the trades – meaning that they compete for trading business, forcing the margins to be smaller.

Another reason why we replaced these 2 securities is again related to the trading volume. If IFNA trades about 3,400 shares per day, and you put in a buy order of 340 shares, your order represents 10% of the volume for that day – that is enough to increase the overall demand for the security, and push the price up. So you end up paying a higher price because you entered a “big” order relative to the market. Likewise, when you enter a sell order, if your order represents a significant portion of the day’s volume, entering your order can push the price down, so that you get less when you sell. In contrast, IYR trading volume is about 14.8 million shares per day, so you can put in a pretty big order without “moving the market” as it is called.

Lastly, in the case of DJP vs. GSC, DJP has simply outperformed GSC. These securities represent two slighly different mixes of commodities, but in the 1-year and 3-year timeframes, DJP has clearly outperformed GSC. For this reason as well, it makes good sense to delete GSC from our portfolio and replace it with DJP.

That’s all for now! Stay tuned tomorrow evening when I will post the Pro-Folio ORIGINAL trade instructions here on the blog.

Best regards-

Matt

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