by Jason Wenk
Often times when the stock market zooms investors get complacent. Money managers too.
What seems to happen is we forget very quickly how painful it is to have markets fall and our accounts drop in value and we instead get filled with euphoria about market rallies. In fact, if we don’t see our money going up as fast as the market we often are disappointed even though we may be experiencing nice gains.
This is a problem, and I’ve got some statistics for our readers to chew on next time they find themselves falling for this investor trap.
The trap is thinking market gains is more important than protecting from market losses. To be sure, protecting from market losses is far, far more important than catching 100% of every market rally. Here’s the proof:
S&P 500 - 25 Years Ending 12/31/2009 - Average Annual Return 7.93%
| Miss the Best | Miss the Worst | Miss Both the Best and Worst |
| 10 Days | 4.83% | 12.14% | 8.92% |
| 20 Days | 2.79% | 14.74% | 9.28% |
| 30 Days | 1.12% | 16.93% | 9.56% |
| 40 Days | (0.46%) | 18.86% | 9.67% |
Source: Hepburn Capital Management 2009 study
As you can see, avoiding the worst days not only helps produce the best returns, it’s also a lot easier on the stomach – even if you make nothing on the markets best days. And if you miss both the best days and the worst days: you still perform better overall than the market and do so with much less risk.
Based on these facts one could surmise that managing investment risk is the most important thing for both money managers and investors to focus on.
So next time you see yourself lagging the market in a rally, keep in mind that missing the big gains is really not nearly as important as having a strategy designed to miss the worst times too.
Note: This is a hypothetical example and there’s never been an investment strategy that missed just the best and worst days of the market. This study also doesn’t take into account management or trading fees that might be incurred in implementing such a strategy. Nor can you invest directly in the S&P 500 index.
May 12, 2010 |
Posted in Uncategorized
|
By Leonard Rhoades
Federal Reserve Chairman Ben Bernanke summed up the US Economy well by making this profound statement, “We’re not out of the wood yet!” A recap of March 2010 economic news would support that statement as the economy has shed over 8.2 Million Jobs since the start of the recession. However, with that said, revisions for January and February report showed upwards of an additional 62,000 jobs created. By far the best news came in March 2010 with the non-farm payrolls report showing an additional 162,000 jobs created. Everyone with a brain understands the need for jobs for without workers generating production and purchasing goods how sustainable can any recovery really be. Evidence by the stock market advances it appears Wall Street anticipates job creation being further stimulated sometime this year.
A continued bright spot for the US Economy seems to be indicators that continue to show positive strength such as the ISM manufacturing and non-manufacturing. Some would argue that these two indicators should be monitored closely for any potential future economic strength or weakness. The ISM Manufacturing Index is released by the Institute of Supply Management which tracks the amount of manufacturing the prior month. The most recent reading was the strongest since 2004.
The big news no doubt came from Washington as Health Care reform passed making history. How this will translate to the economy know one at this point really knows. Providing health care for some 32 Million Americans currently going without has to be considered a huge relief. However, without question many pundits would argue the potential tax consequences could offset Health Care reform benefits. Considering the current federal deficit of over 1.4 trillion the argument of adding further burden could cripple the economic recovery…keep in mind much of the health care reform benefits do not take affect for several years.
Our own proprietary signal for the economy provided a normal reading for the month of April 2010 = 47.78
Recession Probability Analytics is a quantitative, completely mechanical and emotion free way of looking at the strength of the US Economy. When the reading is high, it warns of coming slow – downs and serves as a warning sign to investors. While its use is flexible, it is generally a good idea to use caution when investing in higher risk US assets, such as stocks and high yield bonds when the reading is in red. When the indicator reads “above 50″ we feel there is a high probability the US Economy will worsen in the following month, and therefore, stocks should be invested in with caution. Generally, when this occurs, we reduce stock exposure by 50% on our investment strategies. When the indicator reads “below 45″ we feel there is a high probability the US Economy is within its normal range and therefore should be able to sustain growth.
- Recession Probability Analytics Factors
- Case-Schiller Home Price Index
- Initial Jobless Claims
- Chain Store Sales
- TED Spread (difference between 3 mth. Labor and t-bill)
- Fed Funds Futures
- Core Capital Goods Orders
- Survey Of Business Confidence
- Consumer Comfort Index
April 8, 2010 |
Posted in Uncategorized
|
by Jason Wenk