Whatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did Wall Street get away with pushing these facts of financial life down the basement stairs?
Most investors, many financial advisers, media representatives, and market gurus have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field... simple, yes; realistic, not. I have to wonder if things would be different with a more investor-friendly tax-code, but that's not likely to happen.
Investing with a calendar year focus has no basis in the realities of finance, business, or economics --- the Stock and Bond Markets are clearly more closely related to the Business Cycle than to the Earth's around the Sun. The Stock Market Cycle is the period of time between the two latest highs of a relavant index which are separated by at least a 15% decline in the average. The second high needs only to be 15% above the nadir, it doesn't have to represent a new All Time High (ATH).
Interest rates (based on the 10 Year Treasury Bond), seem to cycle in the two to five year range, and are much more closely related to Business or Economic cycles than they are to the Stock Market Cycle.
Although closely intertwined, none of these financial realities are predictable and, therefore, need to be dealt with as hindsightful tools in the performance analysis process... a process that needs to be personalized with realistic expectations. How many times in the last 20 years did any of these cycles peak on a December 31st?
The "I'll try this approach for a year to see if it works out better than everything else" 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.
As recently as 1980, Separate Account (mutual fund) Investment Managers were reporting performance in terms of income generation and peak-to-peak growth in market value. But that was before investing became the number-two spectator sport in America.
Few investment professionals would argue with the observation that a viable investment program begins with a realistic plan, and most would agree that planning requires identification of long-term goals and objectives. Some experts would even 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 necessarily 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 do it over a period of time that recognizes where we happen to be, cyclically?
Interest Rates have cycled seven or eight times over the past 25 years; the stock market has been nearly twice as volatile. Peak-to-peak analysis, raises a type of question that can at least be portfolio personalized for analysis:
1) Did my equity portfolio grow in market value between June of 2007 and now? After 8 years in the red, the S & P established a new high then, but hasn't come close again since. The IGVSI has hit new highs several times; and MCIM portfolios have probably been hitting new highs regularly since 2009 because of their mandatory income component.
2) Did my income portfolio generate more income than it did last year is still the most important question that should be raised... regardless of current market value.
But as important as it may be to determine the answers to such questions, it is equally important to understand why the results were what they were. Did I withdraw money, or take tax losses on investment grade securities? Did I fail to follow the plan, or lose control of my asset allocation? Did I allow tax considerations to keep me from realizing profits.
By taking away the move-your-money, racetrack, mentality that runs today's investment performance evaluation methodologies, we can create a calmer, more cerebral, management exercise with which to tweak our 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 detracted from the usefulness of both market averages and market statistics. Issue Breadth, 52-week High and Low, Most Actives, Most Advanced, and Most Declined figures now include thousands of these hybrid derivatives.
A bigger problem is the artificial demand for index-included securities --- unrelated to corporate fundamentals. The Investment Grade Value Stock Index and 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?
Think Market Cycle Investment Management and succeed.
Contact John Dohn for more information.
(c) 2013 by Kiawah Golf Investment Seminars