“We’ve been on a roller coaster ride in the financial system and the economy over the last 25 years. It’s going to continue. Now, it’s going to be a roller coaster on steroids. Things can go wrong like it did…May 6th (2010)...in the US stock market. ...People need tools to navigate through this. Buy-and-Hold is gone as a basic investment philosophy. You have to watch the financial flows and take some money off the table when liquidity starts to go the other way.” - J.A. Boeckh
Significant insights were revealed in January 2010 by one of the leading proponents of index investing and an icon of the academic community – Ibbotson Associates’ president, Peng Chen. In an interview with Morningstar discussing Modern Portfolio Theory and its dismal 2008 performance in protecting accounts, Mr. Chen said:
“…we also realized that one of the traditional measures in modern portfolio theory, in particular on the risk side, standard deviation, does not work very well…”
In 2008, all asset classes, except cash, were highly correlated and declined in value. The following list shows which investment choices have been the strongest performers recently, relative to the choices available within a company's retirement plan.
While past performance is not a predictor of future returns, it may provide you with some reassurance that your current investment selections remain within favored market segments. Dynamic Asset Evaluation may help you stay invested in stronger performing assets and help in the decision to eliminate weak asset classes. Recent changes to our process are reflected here:
Any employee using this relative strength listing as a tool for allocating a retirement portfolio should check at least quarterly for new ranking updates that may indicate a change in investment allocation. More information on the our Dynamic Asset Evaluation process is available.
Investor Resources, Inc.'s (IRI) investment committee's view of the markets changes over time with changes in the relative strength of sectors and asset classes. Periodically, IRI's investment committee may favor domestic and/or international equities over fixed income or favor small company growth over large companies or value. More importantly, cash is an essential assset class and should be favored when other investments are in negative trends.
We agree with behavioral finance research that investing success is more likely when you are not emotionally tied to your investments. Consider how much pain would have been avoided in the lives of those who were committed to Enron, Tyco, JD Uniphase, GM or Chrysler if they had an objective relationship with their stocks. More recently you could look at companies "too big to fail" such as Bank of America (BAC), Citi (C) or AIG (AIG). Being a customer or "believing in the company" does not protect your position from a negative market environment. Resources are available to help you understand why "Buy and Hold is Dead."
Diversification is still good process, however, diversification neither assures a profit nor eliminates the risk of experiencing investment losses. We do not recommend investing in less than five of the available options as long as they rank higher than the money market. If money market is ranked #3, it implies 60% money market and 20% in each of the two higher ranked assets.
Fundamentally, we do not recommend investing in assets ranked below money market. Preserve your cash until the assets once again establish a positive bias in their returns and prices.
Prior posting of changing asset allocations can be viewed here.