Money Management

Do you worry about another downturn in the stock market?

In the year 2000, the S&P 500 started a decline, wiping out approximately 46% of its value. Then in 2007, it started another decline – destroying 57% of its value. These losses made it impossible for some people to retire, and set others back financially for many years, if not decades. No one knows when the next downturn will come, but when it does, will you be prepared?

It is true that people’s experiences of the market drive their perceptions of the market. Our experience is that the market can be greatly rewarding assuming risk is controlled in a methodical, no-nonsense way. Since nobody absolutely knows the future, we don’t predict what we think is going to happen; we respond to the different market conditions in different degrees.

Since 1999, we have helped our clients invest through some of the most treacherous of market conditions. We help our clients with strategies for their 401(k)s, individual stocks, retirement plans, mutual funds, and stock options.

If you would like a clear, concise investment plan before another downturn in the stock market occurs, we can help. If you want a clearly defined investment plan that is focused on controlling risk and taking advantage of market trends, give us a call, we can help.

By adopting an investment strategy based upon controlling risk through market action and NOT predictions, you can take advantage of a rising market, prepare for a market downturn, and stop worrying about what is going to happen next in the market.

A clearly defined and executed investment strategy can save you time, money, and the emotional heartache from the belief about being able to control the outcome of any particular investment. The best money managers are excellent at managing risk, because they know that is the only thing they have control over.

Most investors only know how to control risk through the diversification of assets. Fewer know how to control risk through exit strategies, position sizing, and diversification of investment strategies.

In the past – technology, cost, and liquidity all played a factor in pigeonholing an investor to stick to a plan of buying, holding, and hoping things rise in price. In today’s environment, it has become much more cost effective and easier to control, monitor, and take action.

Successful investing starts with understanding how the investment vehicles work, and employing risk-managed strategies around a sound philosophy.

The fact is, different investment strategies go in and out of favor according to market conditions. Buy and hold, trend following, momentum, and swing trading (to name a few) are all excellent strategies in the ‘right’ market. The key is to diversify the strategies, and focus on the long-term trend of the market.

Our money management strategy has several layers within a theme of controlling risk:

 

The first layer of risk control is a concept called Relative Strength.

Relative strength measures the performance of one investment versus another. For example, if large cap stocks are performing better than small caps, the relative strength will favor large caps. Therefore, we would allocate more capital to large caps over small caps. This is important because asset classes go in and out of favor. Furthermore, we believe no matter if you are risky or conservative, you should always take capital preservation in to account. Relative strength helps keep you in the stronger of the two investments you are measuring.

The second layer of risk control is having exit strategies on both the upside and downside for each and every investment purchased.

What this means is that we don’t put pride before profits. The fact is, nobody is right 100% of the time. The good thing is that you don’t need to be right 100% of the time to be successful at investing. However, you do need to control risk so you can live to fight another day.

The third layer of risk control is multi-time frame trend following tactics.

The long-term trend of an investment turns from the inside out. Said another way, if the longer-term trend is up and starts to reverse to the downside, the shorter-term trend will turn down before the longer-term trend.

For example, the shorter-term trend could be down while the long-term trend remains up. Knowing this, we have divided investment decisions into different time frames. By doing this, we start taking capital out of investments that start moving down, but continue to own a percentage in case it is only a relatively short-term correction. If the trend were to continue down, we would continue to scale out of the investment until completely out or the trend reverses to the upside.

The biggest destroyer of investment capital is holding on to investments that continue to go down in value.

That is why we use different time frames. Using different time frames allows us to control risk first while giving us the opportunity for gain. All the for-mentioned tactics control risk for the purpose of protecting and growing principle.

money management

Not sure where to start?

Set a no-obligation appointment today and we will help you determine where you are now, where you want to go, and what needs to be done to get there.