Whatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did MPT theorists get away with pushing these facts of financial life down the basement stairs?
Most investors, many financial advisers, and media talking heads have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field... simple, yes; realistic, not.
Investing with a calendar year focus has no basis in the realities of finance or economics --- the stock and bond markets, clearly, are more closely related to the business cycle than to the earth's orbit of the sun. Loosely, a market cycle is the time between two highs of a "benchmark" index, separated by a decline of at least 15% to 20%... the second high need not represent a new All Time High (ATH).
Interest rates seem to cycle in the two to five year range, and are much more closely related to business cycles than they are to the stock market, but, interest rate sensitive (higher dividend) stocks certainly do seem to have a cyclical mind of their own.
Although closely intertwined, none of these financial realities are predictable and, therefore, need to be dealt with as hindsightful tools for performance analysis... a process that needs to be personalized with realistic expectations. How many times in the last 30 years has any cycle peaked on a December 31st?
The "I'll try this approach for a year to see if it works out better"... mentality, combined with a tax code that rewards losses more than gains, has killed cyclical analysis dead. It's time to get back on our "hogs" and try something old. Let's re-cycle peak-to-peak analysis like we do plastics; it just might put more "green" in our retirement programs.
MCIM "Life Cycle" Portfolios focus on making investment programs more income productive.
As recently as 1980, "separate account" (mutual fund) managers were reporting performance in terms of peak-to-peak market value numbers. But that was before investing became the number-two spectator sport in America.
Most investment professionals would agree that a viable investment program begins with a realistic plan, and that planning requires long-term goals and objectives. Some experts would agree that the end result should be a near autopilot, long-term and increasing, retirement income.
Asset Allocation is used to organize and control the structure of the portfolio so that it operates in a goal directed manner. Is this easy or what! It would be if the average investor would just let things alone long enough for them to work out according to the plan.
That's the rub. Wall Street, the financial media, and financial professionals (including CPAs) have no interest in letting things work out according to plan... even if it's a plan that they designed.
Is it clear that calendar year performance evaluation allows an average of just six months for an equity selection to 'perform'? Is it clear that the change in market value of an income security over the course of a year is meaningless? Is it clear that a portfolio containing both types of securities cannot be compared with an average or index that is comprised of just one or the other?
Peak to Trough to Peak Analysis From Before the Financial Crisis 'Till Now
Human nature is predictable but not always rational. Mother Nature's financial twin's twisted sense of humor, though, is both... and totally unrelated to third rock movements. If the change in a portfolio's market value is really so important, why not study it over a period of time that recognizes where we happen to be, cyclically?
Peak-to-peak analysis, raises these very basic personal portfolio questions:
1) Did my equity portfolio grow at all in market value between November 1999 and October 2007? Between then and August 2013? Investment Grade Value Stocks did; and MCIM portfolios really had to because of the mandatory income component --- and strategic immunity from the "dot com contagion".
MCIM "Life Cycle" Portfolios Credo: No Mutual Funds, No NASDAQ, No IPOs... No Problem!
2) Did my total portfolio generate more "base income" than it did last year is still the most important question that should be raised... particularly in retirement focused programs like 401(k)s. Cost based asset allocation, MCIM "Life Cycle" SOP, with 40% or more invested for income, assures base income growth over any significant measurement period.
But as important as it may be to determine the answers to such questions, it is equally important to understand why they were what they were. Did I withdraw money, or take tax losses on investment grade securities? Did I lose control of my asset allocation? Did I allow tax considerations to keep me from realizing profits?
Did I take advantage of maket downturns or huddle in fear on the sidelines?
By taking away the move-your-money, racetrack, mentality that runs today's popular ETF speculation methodologies, MCIM creates a calmer, more cerebral, management exercise with which to tweak an investment strategy.
It may have been the strategy, it may have been the management, it could have been the diversification formula, or the buy-sell-hold decision-making rules. It may even have been the fear or greed that influenced our judgment. By looking at things cyclically, and analytically, instead of celestially and emotionally, we either allow our strategy to prove itself over a reasonable period of time or obtain the information needed to change it constructively.
The recent popularity of MPT spawned index ETFs has also detracted from the usefulness of once significant market statistics. Issue Breadth, 52-week High and Low, Most Actives, Most Advanced, and Most Declined figures now include thousands of hybrid derivative time bombs, creating demand without consideration of company fundamentals.
IGVSI and focused Market Stats have helped considerably.
Analyze this: if the strategy makes sense in the long run, why knock yourself out in months, quarters, and years? Put some MCIM "Life Cycle" juice into your investment success formula.
Contact John Dohn for more detailed information.