May The Investment Force Be With You
Investment markets got you down, Bunkie? Been blown away by derivative stun guns? When will portfolio market values move back to 2007 levels— and then what will you do about it?
It’s time to overthrow the evil Masters of the Universe and deactivate their weapons of financial destruction. Let’s outlaw the brainwashing that has changed how average investors look at and value their investment portfolios.
It’s time to exorcize the Wall Street demons and return to stocks and bonds— and to QDI, “the Force” for long-term investment portfolio security.
Speculating is complicated, even for financial rocket scientists. What most of us want (or would certainly settle for) is simplicity, stability, and reasonable growth in our productive working capital.
A return to plain vanilla investing strategies with operating procedures that minimize risk and encourage understanding of the financial markets needs to become part of our financial force field.
As bad as things have been since this black hole appeared, investment models true to fundamental concepts, simple strategies, and disciplined operating rules have probably bettered the market numbers in at least six important ways:
One – Higher lows during market downturns: Equity portfolios managed using basic principles of quality, diversification, and income (the QDI) and disciplined profit taking rules should not fall as much in market value as most mutual funds or poorly diversified portfolios.
Constant cash flow, even if not reinvested, places a floor under market values, and investors feel better when their values fall less than the market averages. In soundly managed programs, buying activity slows as prices rise— increasing “smart cash” for buying at lower levels later.
Two – Moves to cash or other sectors before bubbles burst: Disciplined profit taking automatically moves dollars from overheated sectors to cash or undervalued sectors during rising markets. This process creates capital that can be used to lower the average cost of remaining positions or to take advantage of new opportunities.
Investors feel better when no profits have been left on the table.
Three – Maintenance of planned income streams during financial crises: Most financial plans focus so strongly on growing market values that they lose touch with the need for planning a dependable retirement income. They rely on selling equity fund units or inflated indices for cash flow, instead of generating stable income with less exciting cash producing staples.
Steadily increasing annual income can be placed on “cruise control” through the use of the cost basis asset allocation methods contained in the WCM (Working Capital Model). How many would-be retirees are searching for jobs because of improper income planning?
Four – Faster movement to new all time market value highs: When investors have a reasonable understanding of the various cycles impacting their investment portfolios, they develop valid expectations about the market value “performance” of their portfolios.
They are less likely to initiate knee-jerk or panic driven transactions and more likely to take advantage of the new opportunities that lower security prices always create. Additionally, higher quality securities invariably are in the first group to regain popularity with investors as good news reports begin to dominate.
Five – Steady growth in working capital in all market environments: Working capital is measured in terms of cost basis instead of market price. As a result, all income generated from interest, dividends, and realized gains grow working capital regardless of the direction of market prices.
A treasury bond generates the same income at $85 as at $115. Most closed-end municipal bond funds (CEFs) maintained their 5% to 7% tax-free cash flow throughout the financial crisis— in spite of their reduced market values. Similarly, short-term profits on high quality securities have been growing working capital since the current rally took hold in March.
Six – Annual growth in realized “base income” in standard portfolios: WCM portfolios are income machines by design. No security is ever purchased if it does not produce regular dividend or interest payments; at least 30% of all base income should be reallocated to income-objective securities.
Similarly, every dollar of capital gains income, and net portfolio additions are partially allocated to income producers— and the use of a cost based asset allocation formula insures annual income growth.
Few financial professionals begin their careers with any encouragement to become comfortable with individual equity securities and the surprisingly large variety of individual, relatively uncomplicated, and generally safe(r) income producers available for their clients.
Financial products are far more lucrative for their institutional employers and, as a result, the incentives for brokers and advisors to sell products is pretty much irresistible. Few pros can afford to be one with “The Force”.
The Dark Side of investing beckons like a Siren’s song, luring the majority of professional advisors away from the safety and simplicity of QDI. Institutional propaganda, projections, predictions, and hype have the same affect on unsuspecting boatloads of speculators who most often become shipwrecked on the derivative rocks.
Investors and their professionals need to re-evaluate their product orientation and plot a global escape from the Dark Side of investing.
Contact the “Skywalker” foundation for emotional and financial support while making the transition— and may the force be with you.
About the author:
Steve Selengut has been a Professional Investment Manager since 1979.
Author of: The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read, and A Millionaire’s Secret Investment Strategy.