Investing with a calendar year focus has no basis in the realities of finance, business, or economics... isn't it obvious that the Stock
and Bond Markets are far more closely related to the Business Cycle than to the
Earth's around the Sun? Investopedia reports that, during the last sixty
years Quinton
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from peak-to-peak. The Stock Market Cycle (in terms of the S & P 500
Average) is the period of time between the two latest highs of that average
which are separated by at least a 15% decline in the average. The second high
needs only to be 15% above the nadir, it doesn't have to represent a new All
Time High (ATH). Interest rates (based on the 10 Year Treasury Bond), seem to
cycle in the two to five year range, and are much more closely related to
Business or Economic cycles than they are to the Stock Market Cycle.
Confused?
Well, you should be. Although they are closely intertwined David
Moore Jersey , none of these financial realities are predictable and,
therefore, need to be dealt with as hindsightful tools in the performance
analysis process... a process that needs to be undertaken using personalized
expectations. How many times in the last 20 years do you think that any of these
cycles peaked on a December 31st? The "I'll try this approach for a year or so
and then change if it doesn't work out better than everything else" mentality,
combined with a regressive tax code that rewards losses more than gains, has
killed cyclical analysis dead. It's time to get back on our hogs and try
something old. Let's re-cycle peak-to-peak analysis like we do plastics and
paper products. It might just put more "green" in our retirement programs. As
recently as
1980 Frank Clark
Jersey , Separate Account (the first Mutual Funds) Investment Managers
were reporting fund performance in terms of income generation and peak-to-peak
growth in Market Value. But that was before investing became the number-two
spectator sport in America.
Few investment professionals would argue with the observation that a viable investment program begins with the development of
a realistic plan, and most would agree that investment planning requires the
identification of long-term personal goals and objectives. Some experts would
even agree that the end result should be a near autopilot, long-term and
increasing, retirement income. Asset Allocation is used to organize and control
the structure of the portfolio so that it operates in a goal directed manner. Is
this easy or what! It would be if the average investor would just let things
alone long enough for them to work out according to the plan. That's the rub.
Wall Street, the financial
media Nick
Vannett Jersey , and financial professionals (including CPAs) have no
interest in letting things work out according to plan... even if it's a plan
that they designed.
Is it clear that calendar year performance evaluation allows an average of just six months for an equity selection to
'perform'? Is it clear that the change in Market Value of an income security
over the course of a year is meaningless? Is it clear that a portfolio
containing both types of securities cannot be compared with an average or index
that is comprised of just one or the other? It is crystal clear until it's your
portfolio that has had the audacity to shrink in Market Value over the course of
the year! Human nature is predictable but not necessarily rational. Mother
Nature's financial twin's twisted sense of humor, though, is both... and totally
unrelated to third rock movements.
If the change in a portfolio's Market Value is really so important (the Working Capital Model would argue that it is
not), why not do it over a period of time that recognizes where we happen to be,
cyclically? Interest Rates have cycled seven or eight times over the past
twenty-five years; the stock market has been nearly twice as volatile.
Peak-to-peak
analysis Jarran
Reed Jersey , although hindsightful, raises a type of question that can,
at least, be portfolio personalized for analysis:
(1) Did my Equity portfolio grow in Market Value between January 2000 and January of 2002, or
between January 2002 and either January 2004 or June of 2006? These were cycles
on the
DJIA Germain
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established in early 2000. These are meaningful time periods that can be used to
study the effectiveness of various equity-only portfolio strategies. S & P
500 cycles were pretty much the same.
(2) Does my Income Portfolio generate more income today than it did the last time interest rates were at
these levels is still the most important question that should be raised...
regardless of Market Value. Sorry.
But as important as it may be to determine the answers to such questions, it is equally important to understand
why the results were what they were. Did I withdraw money from the portfolio, or
take losses on investment grade securities for tax reasons? Did I fail to follow
the plan, or lose control of my Asset Allocation? Did I change variable expenses
into fixed expenses or allow tax considerations to keep me from realizing
profits. Were there changes in the investment markets that would make
peak-to-peak analysis less meaningful than in the past?
So by taking away the
move-your-money Tyler
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