Since there was little change in the news this week I’m going to take this blog in a slightly different direction. I was struck by a recent Wall Street Journal article entitled, The Weekend Investor: 100% Stock Solution. The article reported that 9% of all mutual fund investors are “all-in” on the stock market. What a huge mistake for 8 million American mutual fund owners.
There is no such thing as a 100% stock solution – ever!
I’m one of those people who believe investors should never be all-in, or all-out, of any stock market. But that’s beside a very important point – a multiple asset class portfolio makes decision making easier, earns profit more efficiently, and when combined with superior 15-51 construction, produces more reward with substantially less risk.
The correlation between risk and reward isn’t how the Wall Street establishment portrays it to be. In my book I show investors how to build a high-powered portfolio using my award winning 15-51 method, which is designed to consistently deliver superior performance results with less risk. The long-term track record of the 15-51 Indicator is proof positive it works (a complete listing of stocks and their according allocations is detailed at the end of chapter 5).
The purpose of building a better mousetrap is to make more money with less portfolio risk. This dynamic affords the investor the opportunity to carry a cash balance and not feel guilty about “missing” stock market gains. A cash balance promotes efficient investing because capital is always available to buy stocks low during stock market sell-offs. Without cash on hand, an investor must sell something low in order to buy something else low during a sell-off. And that’s not efficient or effective.
I’m going to show you a series of charts to illustrate the benefits of a multiple asset class portfolio. The first chart compares “the market” (DJIA) to the 15-51 Indicator (15-51i). See below.
In the two year period since LOSE YOUR BROKER NOT YOUR MONEY was published, the 15-51 Indicator advanced 30% compared to the Dow’s 20% gain. Be reminded that both of these portfolios are comprised entirely of stocks, and as such, are “all-in” on the stock market. Also recall that the 15-51 Indicator has been in correction mode since September of last year. The Dow, lagging behind, has yet to correct.
The best thing about creating your own portfolio like I did with the 15-51 Indicator is that you totally understand its personality and behavior. As shown above, superior 15-51 construction makes it easier to manage your portfolio because “high and low” are plain to see. And since the 15-51 Indicator has half the market risk as the Dow, the 15-51 method produces more money with significantly less risk. That is a great combination, indeed, but it still doesn’t make the “100% stock solution” a good investment strategy.
Illustrating that point is the purpose of this blog.
Besides, maintaining a 100% investment allocation in stocks is to blindly follow the “buy and hold” method of investment. This is nothing short of laziness or ignorance. (Sorry, but it’s true.) Profit requires action, to buy something low and sell it higher. A multiple asset class portfolio makes that action easy.
The next chart compares the DJIA to a portfolio comprised of 50% in cash and 50% in stocks. The 15-51 Indicator will serve as the stock allocation in the 50-50 portfolio, and all portfolios will begin at the Dow’s value at the beginning of the period ($12,583) to minimize scaling. See how the 50-50 portfolio fared in the chart below.
The 50-50 portfolio had a good run but fell short of “market returns” by the end of the two year period, gaining 17% compared to the Dow’s 20%. They ended the period just $375 apart but their risk profiles were substantially different.
When you have multiple asset classes and legitimate targets that mean something, market activity tells you when you to do something – when to sell something high or buy something low. This can’t happen with a one asset class portfolio. There is no reference point to act; no boundary or risk limitation.
On April 5, 2012, stock market gains sent the 50-50 portfolio asset allocations out of whack by 10% points. That allocation variance is a trigger to do something, especially when considering the Market conditions at the time. As a result, the portfolio was rebalanced at that time. Note that April 5, 2012 was not a “perfect” time to rebalance as the portfolio peaked five months later in September.
Because the 50-50 portfolio was rebalanced, profits were locked in and added to its cash balance. This, along with a correcting stock portfolio, caused it to end the period with just 47% of its assets at risk and just $375 less in value compared to the Dow. The DJIA, of course, remained 100% in stocks with all of its 15,116 ending value still at risk.
To put it another way, the Dow needed an additional $8,000 of capital at risk in the stock market to earn just 375 more dollars of return (reward). That’s a lot of risk for a few additional bucks.
However, and by way of rebalancing between two asset classes, the 50-50 portfolio actually incurred a risk reduction. The rebalancing effort locked 75% of the 50-50 portfolio’s earned profit into cash. Those profits can’t be lost, and are no longer at risk to the whims of a stock market correction.
Even so, the 50-50 portfolio did not achieve an inherent Lose Your Broker objective: to outperform “market returns.” To do that a 60-40 stock-to-cash split was required.
A 60-40 portfolio also had to be rebalanced, but not until August 2012. Again, the rebalancing point was selected when 60-40’s asset allocation targets were sent 10% points out of whack by stock market gains. Timing again wasn’t perfect, as the stock portfolio peaked one month after rebalancing.
The next chart compares all three portfolios: the Dow, 50-50, and 60-40. See below.
The 60-40 portfolio ended the two year stint fractionally above the DJIA, up 20.3% versus 20.1%, respectively. Here the Dow had to put $6,600 more capital at risk to earn $16 less – so not worth the risk – and again ended the period all-in on the stock market.
The 60-40 portfolio ended the period with just 57% of its capital at risk. It produced more reward, and because it was rebalanced, 62% of its total gain had been locked into cash and was no longer at risk in the stock market.
Efficient, effective, and superior performance – multiple asset class portfolios and 15-51 construction are the only way to go.
That’s the Lose Your Broker Solution.
I have one more point to add before signing out this week. One of the most frequently asked questions I get is: What is a good return percentage to target or accept?
That’s a hard question to answer generically but I put it this way:
From the monetary side, a portfolio breaks-even when it returns the inflation rate. Performance three times the inflation rate can be considered “decent” money, and five times better is “solid.”
From the economic side, a portfolio that doesn’t keep pace with the growth rate of Gross Domestic Product (GDP) is missing an opportunity. Portfolio performance three times GDP growth can be considered a “decent” return, and five times better is “solid.”
Right now, for instance, inflation and GDP growth are about the same, roughly 2%. That said, most investors should be looking for between 6% to 10% annual performance gains.
Above that the best advice I have for investors is to maintain a long term perspective and trade not on whims of the day but on changes in key fundamentals, like Market condition, stock market valuation, and asset allocation. Take one of these out of the investment equation and the job gets a lot harder. There’s no good reason to do that.
Going all-in on the stock market isn’t worth the risk. And trust me: nothing is more reassuring than knowing you’re not all-in a finicky stock market.
We’re on the cusp of one right now.
Stay tuned…