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Ten Time-Tested Investment Portfolio Risk Minimizers
Market Cycle Investment Management is a logical, reality-based, alternative to MPT --- a sexy, but totally speculative, mathematical monster that pretends to know the future. Its focus is on market value curve smoothing rather than on capital building and income generation.
MPT aficionados admit that volatility (the natural state of markets) cripples user results --- MCIM users shout: "Bring It On, We Thrive On It"!
Don't mess with the investment gods; accept the cycles and volatility they throw at you; respect and use them wisely for a better chance at investment success. Find meaningful numbers that chart current positioning here: IGVSI.
Bohicket Creek, in coastal SC, has tides ranging from four to six feet, twice a day, every day --- not unlike the gyrations of the stock market. If you are out in the ocean at high tide, you risk walking home shin-deep in Pluff Mud a few hours later.
Boaters run aground by ignoring tides, charts, and GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives --- they can't see the oncoming tsunamis of cyclical change.
Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.
Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to waves of varying economic, political, and hysterical circumstances. You are the captain of your investment ship. Use these ten risk-minimizers for portfolio navigation:
Note: All of these risk minimizing strategies work best individually, when they are all used in a portfolio, collectively.
1. Identify realistic goals that include time, risk-tolerance, and future income needs --- chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.
2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between growth purpose and income purpose securities. Diversification limits the size of individual and sector holdings. Both hedge against the risk of loss and are done best with a cost based approach.
3. Be patient with your plan and think of it as a long-term voyage to a specific destination --- tack infrequently and "reach" broadly. There is no popular index or average that matches your portfolio, and calendar sub-divisions have no relationship to market, interest rate, or economic cycles.
4. Never fall in love with a security. No reasonable profit, in either class of security, should ever go unrealized. Profit targeting must be part of your plan, and keep in mind that three sevens beat two tens --- and is much easier to achieve
5. Prevent "analysis paralysis" from short circuiting your decision making powers. A narrow focus will reduce confusion, hindsight, course changes and hysteria. Run with cyclical winds and waves.
6. Burn or delete any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Don't sport a hodgepodge portfolio of mutual funds, index ETFs, partnerships, pennies, hedges, shorts, metals, options, currencies, etc.
Consumers' obsession with products underlines how impossible it is for financial professionals to survive without them. Consumers buy products; investors select securities... pause and repeat.
7. Attend a workshop on interest rate expectation sensitive securities and learn to deal with changes in their market value --- in either direction. Few investors ever realize the full power of their income portfolio. Market value changes must be expected and understood, not reacted to with fear or greed. Fixed income does not mean fixed price.
8. Ignore Mother Nature's evil twin daughters, speculation and pessimism. They'll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by their Momma. Never buy stocks at all time high prices and avoid story stocks religiously. Always buy slowly when prices fall and sell quickly when targets are reached.
9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizons, and/or "apples to oranges" performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned.
10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more derivative risk you are adding to your portfolio.
Compounding the problems that investors face managing their investments is the sensationalism that the media brings to the process. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques. It is absolutely not a competitive event.
Do most individual investors have difficulty minimizing investment risk in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements? You bet they do!
Click for Details --> Risk Minimization, Article I
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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 free 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.