Submitted by Steve Selengut
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Investment Performance Expectations: MCIM Portfolio Fine Tuning
Contrary to popular belief and Wall Street propaganda, investing is not a competitive event. Rather, it is a uniquely personal, goal-directed activity that individuals must organize and control for themselves. Too few appreciate that it is a long-term enterprise and only a handful have discovered that DJIA and S & P 500 numbers are only useful at their extremes.
You need to be buying when the doom and gloom is thick enough to cut with a knife, and selling at reasonable profits when the averages seem like they can only go up.
As much as you love to hear about quarterly market value numbers and comparisons with the averages over short-term blinks of the investment eye, you will not be accommodated here. We're going to talk about investing, and some more meaningful numbers that should allow you to fine-tune your "market value" performance expectations.
Why is market value in quotes? Because the relevance of a market-value-only focus is, itself, suspect. Isn't it the type of thinking that threw the financial markets into a death spiral in 2008? Years ago, lenders sought as much collateral as possible to secure their loans; to some, defaults were welcome. Interest rates charged were commensurate with risk.
The less worthy a borrower was, the more collateral the lender required --- and the higher the interest rate charged. Still, the fact that a secured loan could become under-collateralized due to market forces was a given ---part of the business, and the reason for reasonable down payments.
The fact that the loan is greater than the current market value of the jewelry, car, boat, refrigerator, or shopping center does not make them worthless --- just cyclically uncomfortable for lenders. The payments keep rolling in, most of the time.
How many of us are going to stop making payments on our toys and necessities because we can't sell them for more than some fool loaned us for the purchase? This is simply the way commerce is done. If you are "under water", you'll get over it. If your collateral is less valuable than you would like, help the debtor make the payments.
From either direction, the stuff just can't be considered valueless --- unless big dumb brother makes it so. Abandon "mark-to-market", disarm all derivative time bombs and get back to business as usual --- and plain vanilla stocks and bonds. Amen.
Generally speaking, the analysis of calendar period numbers accomplishes little while generating transactions that often damage the long-term viability of investment programs. Investors are encouraged to sell things that move lower in price and to buy those that become most pricey --- the unofficial cycle of fear, greed, and bubble.
How can I get you to stop fixating on monthly market values and to focus on the purpose of the securities within the portfolio? Most of us are trained to deal with seasons, fashion trends, biological changes, waning sports dynasties, etc. Instinctively, we expect, and prepare for change effectively --- but not when it comes to investing, where planning and preparation is just talk.
Steps one through three in the fine-tuning process are these:
1) Understand that all investing involves some form of risk --- risk that can be minimized by diversifying properly among investment grade, income-paying securities. Each level of "derivatization" compounds all risk.
2) A security's price, or market value, is a function of far too many variables, and cycles, to be either predictable or meaningful in the short term. Most often, price is determined more by investor emotions and speculator's bets than it is by security fundamentals --- especially under Modern Portfolio Theory hypnosis.
3) Most high quality income securities can be expected to continue producing income regardless of their market price and most investment grade equity securities purchased at relatively low prices will eventually provide an opportunity for reasonable profit. Both will constantly repeat their cycles.
With this understanding alone, investors at all levels (most of us are not fat cats) could spend less time avoiding profits and bargains and pay more attention to the purpose of the securities we own. Income securities are acquired for cash flow. If they fall in price, buying more reduces average cost and increases yield. A rise in price to a reasonable profit level must be jumped upon with a huge smile.
Equity securities are much more complex, but IGVSI securities in a Market Cycle Investment Management portfolio may be added to at lower prices to assure a more easily attainable, and profitable, exit point. No reasonable profit should ever go unrealized.
With these parameters branded on your investment portfolio forehead, there are just three numbers you need to track in order to form valid value expectations for your equity positions:
One: Issue Breadth statistics are the single most reliable indicator of what is going on in the stock market. Clearly, if more issues are going up in price than down, for a meaningful period of time, so should the equity bucket of the portfolio --- and vice versa.
Two: 52-Week High/Low data compare the number of issues establishing new 52-week high ground with the number sinking to new 52-week lows. Superficial analysis is very straightforward --- there should be more highs in an upward trending market and more lows during a correction.
Three: The IGVSI bargain level monitor reports on the number of investment grade value stocks that are at and near acceptable purchase levels. The longer the list, the more likely your market value numbers are lower than you would like.
So what about the thirty percent or more of your portfolio that should always be invested in income producers? There are fewer things to consider, but never even think the words: "I don't need the income, I'm just investing for growth", it exposes your amateur status.
Get a feel for the aptly acronymed IRE (Interest Rate Expectations) in the market place--- and a feel is really all that is necessary. If expectations are for lower rates, prices should move higher. If they haven't, make sure you understand why --- like the 2008 credit crisis, for example, and its impact on income CEFs.
The other is to get the income job done years in advance of retirement by using a cost-based asset allocation plan--- The Working Capital Model.
So, if you asset allocate properly for your objectives, and stick to your plan throughout the many cycles that will roller coaster your emotions and market values, you will find that your income constantly rises --- and so will your productive invested capital.
Whoa, that's the way it's supposed to be.
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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.
|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.