A Proven Investment Strategy

            If I were to ask you which decade of the last 100 years had the largest stock market decline, what would be your guess, the 1930’s?  Wrong.  The just-experienced decade of 2000 to 2010 saw the largest loss of any decade (Weekly Market Commentary, Jeffrey Kleintop, LPL Financial Research, Jan. 2010).

            If you had invested $120,000 into the S&P 500 (an index of 500 of the largest companies in America) at the decade’s inception, your money would have “grown” to $109,082, for a loss of $10,918!

            Many have preached in the past that buy-and-hold index investing was the way to consistently make money.  Could we safely say that this long-time investment philosophy has now been proven less effective?

            As I manage my clients’ money I have found some consistencies in a very volatile economic environment.  First of all, what looks good today may not look good tomorrow.  You have to be willing to respond to a suddenly changing condition.

            For example, a month ago, many stock analysts were saying great things about the future prospects of the Big Banks.  They were raising their earnings forecasts now that many of the banks were experiencing fewer credit losses.  If an investor had bought and held Big Bank stocks through the news from Obama last week that he wants to raise the fees charged by the government to the Big Banks, that investor would not likely be happy with the results.  However, if that same investor would have pared back his holdings in the banks when the news from Obama had first surfaced, losses would likely have been minimized and the money could have been re-invested elsewhere.

            People sometimes ask me if I am worried that online stock trading - where individuals do their own buying and selling in their accounts without the advice of a professional advisor - will have a negative impact upon the industry that I work in.  I am quick to tell them ‘no’ and to emphasize that, if anything, the volatile conditions that have resulted from the recent economic crisis have re-emphasized the need for professional advice.

            The use of a tactical asset allocation investing approach – where a strategy is used that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors – has proven to be more valuable in these volatile and ever-changing economic times.  It is a moderately active strategy since investment managers using it typically return to the portfolio’s original strategic asset mix when desired short-term profits are achieved.

            According to Jeffrey Kleintop, Chief Marketing Strategist at LPL Financial, if the investor mentioned earlier who invested $120,000 into the S&P 500 at the beginning of the last decade for a $10,918 loss at the end of the decade, had instead consistently invested $1,000 per month into that same index, their end-of-decade balance would have been a profitable $128,425.64.  This more active approach obviously would have paid dividends to the investor. (Please note: The S&P 500 is an unmanaged index cannot be invested into directly.

            As I look ahead to the coming decade, many lessons have been learned from the difficult results of the past one.  Never put all of your money into one investment.  Never buy an investment just because your neighbor says it is going to be the next ‘hottest thing.’ If it can be avoided, never have your 401k mostly invested in your company’s stock.  But mostly, actively managing your portfolio is a valuable strategy to consider.

            Even if the 2010’s offer a repeat performance of the miserable 2000’s, investors can find opportunities to invest and pursue gains in their portfolios by consistently saving and tactically managing the investments in their portfolio.  Rather than look back with heartache at what may have been a lost decade, I encourage investors to look forward with new-found experience and invest for success in the 2010’s.

Opinions expressed are those of the author and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Past performance is no guarantee of a future result.

Jim Rigtrup is the owner of and a Wealth Manager with Keystone Wealth Management Group, LLC.  Sandy, UT.  He can be reached at (801) 572-1077 or at jim.rigtrup@lpl.com

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