Investors are scared. We laugh at those who in the early 1970's bought the nifty fifty stocks -- fifty solid companies that you wanted to own for the rest of your life and pass onto your heirs, only to watch these stocks tumble 80 to 90 percent from their highs from 1972 to 1974. Yet what did most reasonable CNBC viewers do in early 2000 but buy "solid companies with good earnings, no debt, and high cash balances" and watch these keepers like EMC and Qualcomm tumble 80 to 90 percent.
One won't do that again. Right? So what does one do now, with the horses out of the barn and retirement inching closer every day? Let's examine just a few of our background assumptions and see why B & A Sector Watch may have a solution.
Why Invest In the Stock Market?
People invest in the stock market for three basic reasons.
FIRST: The stock market "game" is "fixed" in your favor. While it took 25 years to recover from the 1929 drop of 87 percent, and ten years to recover from the simultaneous Great Society and Vietnam spending of the late 1960's and early 1970's, the stock market has always gone up. We have recovered from every bear market and have moved higher. See Market Corrections and Recovery Times for more details and information available from B & A Sector Watch upon request. The point is, over any thirty year period the stock market's direction has been up. John Bogle of Vanguard, the nation's largest mutual fund company, estimates that stocks have returned around a 6.5 percent annual payoff on average throughout the twentieth century. During the 1980's and 1990's, double-digit returns were the norm.
SECONDLY: You have financial goals and target dollar amounts that you need to achieve. We all want to retire comfortably some day. Money placed in the stock market can be a very liquid means to achieve this goal. With the stock market there are no guarantees. Past performance does not mean future performance necessarily. But the historic tendencies are there for any one to see. An ordinary, reasonable and prudent person looking back one hundred years and looking forward for the next thirty years, would probably accept the 6.5 percent average return expectation from stocks as an amount to pencil in. At 6.5 percent a year, it would take eleven years and one month to double your starting capital, assuming no draw downs for taxes and fees of any kind. For example, if your financial target is to have $200,000 in 11.08 years, you would need to start with $100,000 today and earn 6.5 percent a year to reach your goal.
THIRDLY: You have almost immediate liquidity. During the 1987 market meltdown, B & A Sector Watch's investment advisor, Bob Benkovich, watched nervously as the market tumbled. The perceived "safe haven" then was government insured investment vehicles such as U.S. thirty year bonds and U.S. federally insured money market accounts. When markets tumble, there is a scramble to the nearest foxhole. No one knows where the next "safe haven" will be. But more importantly, the investment vehicles used by B & A Sector Watch to date all have daily liquidity.
How Do Bonds And Real Estate Compare To Stocks?
Bonds and real estate should have a place in every portfolio.
A major warning now exists in the bond market with interest rates at a forty year low. As interest rates go up, the value of the underlying certificate goes down. You could go from a current two percent a year annual return to an eight percent annual return in the near future in your bond market yield while the underlying certificate value loses thirty to forty percent of its current value at the same time. If you never sell the bond portion of your portfolio and diversity by investing in bonds of different maturities, you can get a handle on bonds and use them effectively to provide necessary retirement income. According to The Financial Times Global Guide To Investing, if we look at London's average interest return on cash or cash equivalent investments for the twentieth century, a rate of five percent would be a good working number. So let's pencil in that five percent number as an average working number for bonds and cash equivalents. Bonds and cash do need to be in your porfolio calculations. For "growth" however, you still need the stock market. One, two or three percent a year CD returns won't reach most financial goals. By the "Rule of 72", with a two percent a year return, it will take 36 years to double your money. That assumes no inflation and no currency games at the same time.
Real estate is another alternative investment that has its place. In the 1950's, the typical middle class worker figured he would need to have his row house paid off, $10,000 in the bank, and that social security check coming in to retire comfortably. A sliding dollar and inflation caused a real love/hate relationship with real estate. Nothing down and leveraged real estate purchases came into and out of favor over the years as property taxes and utility rates stabilized and increased. Real estate owners went from fat cats to property poor when real estate debt exceeded the fair market value of the underlying real estate holding at different times. Areas of the country as diverse as Appalachia, Albany, New York, and Milwaukee, Wisconsin, all testify to the treachery of real estate holdings when economic conditions change. No one knows when the next real estate bubble will burst. Japan is waiting for a real estate and stock market recovery since 1987. Things haven't been that bad since 1987 in the U. S. A. But currency games and international politics can change valuations almost overnight. Imagine just what denominating oil in Euros instead of in U. S. Dollars would do to any kind of asset valuation.
The benefits of home ownership are many. Generations of Americans needed little incentive to own their own home and saw the value there. With nearly seventy percent of Americans owning their own home -- an all time record high -- shouldn't an alarm bell be going off somewhere to warn us that this type of investment is not just at a historical high but at a
historical extreme?
The bottom line on investing in stocks, real estate, bonds or cash equivalents, is that they all have their place. Our job as investors is to figure out how much to put in each of these investment vehicles to accelerate our wealth as quickly as possible. B & A Sector Watch is not a financial planning firm. We are investment advisors dedicated to helping you achieve your financial goals. Our job at B & A Sector Watch is to grow your and our (that's right -- we are invested right along with you with our own money) stock market investments as quickly as possible making reasonable assumptions and keeping risk to as low a level as possible.
Our investment advisor, Dr. Bob Benkovich, Ph.D., has spent a lot of time in the academic world. The view we are trying to present here is not so much a particular academic's point of view but the consensus academic point of view prevalent on college campuses for most of our formative years. It is important because it just might help us make money.
The Academic View
If you can believe the prevailing attitude prevalent on college campuses among academics for the last three generations, at age 50 a person should be working towards home ownership and have the rest of their assets roughly broken down into three investment areas: 50% in stocks, 40% in bonds and 10% in cash or assets one can liquidate on a one day's notice. For each year of life after 50, one percent is taken out of stocks and put into bonds.
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At age 50: Stocks 50% Bonds 40% Cash 10% |
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For example, at age 70, one would have 30% of investments in stocks, 60 percent in bonds and 10 percent in cash. You get to retire when your bond and cash positions return enough money for you to live on. The stock portion is considered the "growth" vehicle and gets pruned back at that one percent a year rate. The attitude underlying this consensus view, the same attitude underlying modern portfolio theory, was there when a Nobel Prize in economics was awarded during the bull market run from 1982 to March of 2000. Somewhere in between Eric Hoffer's critique of academics and Will Roger's common sense adage ("I'm not worried about the return ON my money, just the return OF my money"), a reasonable person could wonder whether the twentieth century was just the time for the United States and expansionism. John Bogle of Vanguard's 6.5 percent expected return from stock index investments, the norm for the past century, shouldn't be forgotten. A cynic could counter that a 1 percent a year return was the norm for the nineteenth century by making a few modest assumptions and that the twentieth century was a never to reappear again anomaly. Before we all move to China (for the twenty first century will belong to China), or swear by Robert Prechter and Eliott Wave Theory and wait for the Dow to break 1000, or do what they did in the 1930's and prohibit our heirs from ever investing in stocks in their lifetimes as a condition of inheritance, there has got to be a better way to manage our assets.
Where And How Do I Invest In The Stock Market?
For over fifty years now, indexing has outperformed over eighty percent of market timing strategies. In indexing, you buy the major market indexes like the S&P 500 or NASDAQ 100 and hang on. In any one year, indexes can go up and they can go down. But the strategy of actually buying the index will make you smarter than 80 percent of timers who try different approaches to maximize one's total return. At B & A Sector Watch, we have gone one step further. Our indexes are either with or without leverage. We provide once or twice the performance of the underlying index all in a no-load setting. Add timing to the mix along with daily liquidity and you can see several good reasons why you should invest through B & A Sector Watch.
Finally, like an untapped game preserve, stock market sectors are there for anyone's taking. When you try to outperform the stock index strategy, sectors provide the volatility for a somewhat more aggressive trader to exceed the index benchmark. At B & A Sector Watch we use a genetic algorithm to ride the sector waves, always trying to stay with the sector that is outperforming. Our genetic algorithm constantly adjusts to ever changing sector market conditions trying to get that benchmark index out performance to help you achieve your financial goals hopefully within a shorter time frame.
Just How Important Is Timing?
It does indeed seem ludicrous when we gaze into our crystal ball and see the market declining the way it did from 2000 to 2002 to hear an academic type say you've got to hang in there. Ed Hart used to say "hold" was shorthand for you hold while I and the smart insiders sell. Successful timing is the way to keep out of markets in bearish down trends and into markets in bullish up trends. There is no "Holy Grail" timing method that always works. Indicators fall into and out of favor. In their landmark study, Katz and McCormick showed that all the favorite cyclical and moving averages just stopped working at the turn of the century. MACD, RSI, Stochastics, Seasonality, Sentiment Measures, On Balance and Put Volume Indicators, Historical Tendencies and Trader's Almanac Strategies, top tier investing, and so on -- once all darling indicators, all at once just stopped working when we needed them the most. Tried and true chart patterns got us good. The famous "head and shoulders" pattern was measured as 67% reliable in 1968. A recent 2002 Technical Analysis of Stocks and Commodities article reported a computer crunching measurement and reliability in only 33% of the cases. What happened there?
Nowadays, individual investors and institutions are easily spooked by the markets and move quickly to take profits. Price Headley's June 2003 article in Stocks and Commodities shows the sagging nature of the market's uptrend bias for the eight years ending in 2002 using the Dow Jones Industrial Average.
Efficiency of the Dow's Movement
Year Ending Directional
12/29/1995 26.6%
12/31/1996 15.9%
12/31/1997 9.0%
12/31/1998 6.6%
12/30/1999 10.9%
12/29/2000 -2.5%
12/31/2001 -3.1%
12/31/2002 -6.1%
While it is getting harder and harder to be a perma-bull because of this kind of eight year giddiness, look at what we have done at B & A Sector Watch. B & A Sector Watch is uniquely positioned to help you achieve your financial goals with a conservative enhanced index strategy. It's all about money and having a sensible, calculated and measured approach to investing in this volatile market.
Figure your financial targets and get started with B & A Sector Watch.
We are there to help you reach your financial goals.
B & A Sector Watch was born at the top of the bull market in June of 1999. Our advice to today's terrified investors is threefold:
FIRST
Academics aren't always wrong about everything. If you don't have any strategy, use the 50/40/10 at age 50 strategy to get started earlier to properly align your asset mix. First, own your home for many reasons. Then allocate your remaining assets between stocks, bonds and cash using some kind of comfort strategy. If you don't have one, use the pie chart to get started.
SECOND
Be aware of the risks in each investment category and how best to manage that risk. See the insert Types of Risk and How to Manage Them, to get an overview of what you are doing and why.
THIRD
When it comes to allocating the stock market part of your asset mix use indexing or leveraged indexing to achieve your goals.
In a nutshell, that is it. Nice and simple. No need to worry about whether you have a non-correlated asset mix which reduces risk but also lowers your return historically until we hit that bump when the non-correlated assets are now correlated and everything is going down all of a sudden for the first time. No need to lose any sleep wondering if pure seasonality which stopped working in 1985, modified seasonality which stopped working in 1995 or day of the week strategies which come into and fall out of favor, will carry us towards our investment goals.
Contact our investment advisor, Bob Benkovich, and get started on the road to achieving your financial goals with a sensible market approach. Just to reemphasize what you can realistically achieve, remember this example. Using enhanced indexing at B & A Sector Watch, investing only in the S&P 500, and assuming an average annual return based on the past 100 years of performance, one can anticipate a thirteen percent a year average return. But even at thirteen percent, it will take you a little over five and a half years to double your money. That translates to taking a $100,000.00 investment and turning it into $400,000.00 in a little over eleven years. It also translates into taking a $25,000.00 investment and turning it into $400,000.00 in a little over twenty-two years. A journey of a thousand miles begins with a single step. Get started today with B & A Sector Watch and make your financial dreams a reality.
Bob Benkovich with former presidential candidate Steve Forbes. Bob can’t decide on whether to call this picture “Two Politicians In NYC” or “The Billionaire And The Wannabe”.