Submitted by The Investment Shadow
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Lemmings At Financial Cliff: Ten Do's and Don'ts
A rallly is a beautiful thing, particularly when the correction preceding it was embraced enthusiastically. This is the time to harvest your profits --- pipe dreams of great wealth and inflated ego aside --- jump on those profits before they erode before your disbelieving eyes. If you over think the environment or over cook the research, you'll absolutely lose the profits.
Unlike many things in life, stock market realities need to be dealt with quickly, decisively, and with zero hindsight --- and this market reality? No rally in financial market history has ever escaped the ensuing correction. In the real world of investing, most unrealized profits eventually hit the tax return as realized losses.
There's been a force five change in the magnitude of corrections --- artificial ownership speculation vehicles (AOSVs) multiply the demand for individual securities significantly more than the buy-and-hold(ish) open end mutual funds used to do. Few individual investors take the time to buy and sell actual stocks and bonds.
But, as always, the broader and longer the upward movement, the steeper and more painful the plunge becomes. The S & P 500 has logged new all time highs 22 times this year and is now up a whopping 11% from 2007 levels; Investment Grade Value Stocks (IGVSs) started striking new highs in 2011, have set 44 newbies since 2007 and have risen roughly 27%.
We're looking at a six year rally; is it déjà view 1987 all over again? One can only be prepared. If you buy nearly anything in an equity derivative today people (ETF, CEF, conventional mutual fund), you will be paying more than anyone on the planet has ever paid before... anyone, ever! Only five IGVSs are in Market Cycle Investment Management (MCIM) buying range.
But Wall Street keeps pushing the lemmings closer to the cliff. Sell now, hell no!
Here's a list of ten things to do and to think about right now to protect yourself better than you did the last time a correction blindsided you:
1. Your present asset allocation should have been tuned in to your goals and objectives. Resist the urge to increase your equity allocation because you expect a further rise in stock prices. That would be an attempt to time the market, which is, rather obviously, impossible.
2. Take a look at the past. There has never been a rally that has not succumbed to the next correction, so set reasonable profit-taking targets and pull the trigger. Don't be concerned about lower fixed income CEF prices, take advantage of them. The charts show clearly how speculators leave safer ground as their greed strengthens
3. After taking a profit, don’t look back and get yourself agitated. There’s no such thing as a bad profit and no place for hindsight in an investment program.
4. Take a look at the future. Nope, you can’t tell when the correction will come or how long it will last. If you are taking profits during the rally, you will be able to love the correction with equal (almost) enthusiasm.
5. As the rally continues, sell more quickly as opposed to less quickly, and establish new positions slowly and incompletely. Hope for a short and steep decline, but prepare for a longer one.
6. Understand and embrace the “smart cash” concept, an integral part of the investor’s creed.
7. Since the equity part of your portfolio is at, or very close to, an all-time high-value level, examine your holdings to cull the weakest position now, while it will be least painful. Examine both fundamentals and price, giving significantly more weight to the former. Don’t force the issue.
8. Identify new positions using a consistent set of rules, rally, or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out.
9. Examine your portfolio’s performance with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar quarters and years; and only with the use of the working capital model, because it tunes in to your personal asset allocation.
Your MCIM portfolio will always be fully invested within the "Income Bucket"; don't hesitate to over indulge a bit at market peaks. The increased income will help you to re-fill the equity bucket during the correction.
10. Remember that there is no single index number to use for comparison purposes with a properly designed Market Cycle Investment Management portfolio. And no time frame is as significant as the market cycle itself. None. Nadda.
Current Peak to Peak numbers show the IGVSI (Investment Grade Value Stock Index) has outperformed the S & P 500 by 2.45 times from the 2007 peak to this one. The income portion of MCIM portfolios are generating dependable 6% and higher streams of income, with much higher yields available for new investments.
As the stock market gets frothy, bubblicious if you will, you will experience erosion in the market value of your income positions. Investors always become speculators as Wall Street fans the greed. Have patience, it won't be so long before equity prices return to a more comfortable buying range ... and, likely, well beyond.
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|Please read this disclaimer:|
Steve Selengut is registered as an investment adviser representative. His assessments and opinions are purely his own. None of the information presented here should be construed as an endorsement of any business entity; the information is only intended to be educational and thought provoking.
Risk Management: Income, 401k, and IRA Programs
Take a tour of a professional investment managers' private SEP IRA program during ten years surrounding the financial crisis:
In developing the investment plan, personal financial goals, objectives, time frames, and future income requirements should all be considered. A first step would be to assure that small portfolios (under $50,000) are at least 50% income focused.
At the $100,000 level, between 30% and 40% income focused is fine, but above age 50, the income focus allocation needs to be no less than 40%... and it could increase in 10% increments every five years.
The "Income Bucket" of the Asset Allocation is itself a portfolio risk minimization tool, and when combined with an "Equity Bucket" that includes only Investment Grade Value Stocks, it becomes a very powerful risk regulator over the life of the portfolio.
Other Risk Minimizers include: "Working Capital Model" based Asset Allocation, fundamental quality based selection criteria, diversification and income production rules, and profit taking guidelines for all securities,
Dealing with changes in the Investment Environment productively involves a market/interest rate/economic cycle appreciation, as has evolved in the Market Cycle Investment Management (MCIM) methodology. Investors must formulate realistic expectations about investment securities--- by class and by type. This will help them deal more effectively with short term events, disruptions and dislocations.
Over the past twenty years, the market has transitioned into a "passive", more products than ever before, environment on the equity side... while income purpose investing has actually become much easier in the right vehicles. MCIM relies on income closed end funds to power our programs.
To illustrate just how powerful the combination of highest quality equities plus long term closed end funds has been during this time... we have provided an audio PowerPoint that illustrates the development of a Self Directed IRA portfolio from 2004 through 2014.
Throughout the years surrounding the "Financial Crisis", Annual income nearly tripled from $8,400 to $23,400 and Working Capital grew 80% $198,000 to $356,000.
Total income is 6.5% of capital and more than covers the RMD.
Managing income purpose securities requires price volatility understanding and disciplined income reinvestment protocals. "Total realized return" (emphasis on the realized) and compound earnings growth are the key elements. All forms of income secuities are liquid when dealt with in Closed End Funds.
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|Please read this disclaimer:|
Steve Selengut is registered as an investment advisor representative. His assessments and opinions are purely his own and do not represent the views of any other entity. None of his commentary is or should be considered either investment advice or a solicitation of business. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be or should be construed as an endorsement of any entity or organization. The reader should not assume that any strategies, or investments mentioned are any more than illustrations --- they are never recommendations, and others will most certainly disagree with the thoughts presented in the article.