Market Cycle Investment Management With Ten Time Tested Risk
Minimizers
With a reality-based perspective, investors appreciate that falling market values
are opportunities to add to portfolios. Loss taking and cash hording as stop loss measures for income portfolios is
a flawed strategy from all but one perspective --- that of the salesperson.
That seemingly rational form of attempted market timing reduces the amount of income available for reinvestment and
living expenses, in an approach that creates victims of higher interest rates instead of beneficiaries. You need to
welcome both higher and lower interest rates, if for no other reason than that you can't prevent them.
Don't mess with the investment gods; accept the cycles they throw at you; respect and use them wisely for a better
chance of investment success. Find meaningful numbers that signal cyclical change and which chart current
positioning. Try the IGVSI and related Issue Breadth, High vs. Low, and Bargain Monitor analytics.
Bohicket Creek, in coastal South Carolina, has tides ranging from four to seven feet, twice a day, every day ---
not unlike the gyrations of the stock market. If you are in the ocean at high tide, and stay too long, you risk
walking home shin-deep in Pluff Mud a few hours later.
Boaters run aground by not paying attention to tides, charts, navigation tools and their GPSes. Investors get
swamped with information, media noise, breaking news, politicians, gurus, and derivatives --- so much so that they
can't see the oncoming fog banks and 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
commander of your investment fleet. Use these ten risk-minimizers as lifeboats:
1. Identify realistic goals that include time, risk-tolerance, and future income requirements --- 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 equity and income securities. Diversification limits the size of individual holdings in several ways. Both
hedge against the risk of loss. Both are done best using a cost based approach.
3. Be patient with your plan and think of it as a long-term voyage to a specific destination --- change direction
infrequently and gradually. 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 beats two tens --- and
is much easier to achieve.
5. Prevent "analysis paralysis" from short-circuiting your decision-making powers. Limit the information you allow
into your course charting process, and avoid any form of future prediction or bet covering.
6. Burn, delete, toss-out-the-window any short cuts or gimmicks that are supposed to provide instant stock picking
success with minimum effort. Consumers' obsession with products underlines how Wall Street has made it impossible
for financial professionals to survive without them. Remember: consumers buy products; investors select
securities.
7. Attend a workshop on interest rate expectation (IRE) 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
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
horizon, 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 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 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!
Go Back To Part I: Part I - Minimize
Market Risk
About the Author: Steve Selengut
Professional investment portfolio manager. BA Business, Gettysburg College, MBA, Professional Management,
Pace University, Paul Harris Fellow, Phi Gamma Delta, AAII member & speaker, Steve Selengut has been a
private investment manager since 1979, as the CEO of Sanco Services Inc.
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