Thu 7 May 2009
Investment Performance Evaluation Re-Evaluated: Part Two
Posted by Steve Selengut under Investing1 Comment
The Working Capital Model (WCM) looks at investment performance differently, less emotionally, and without a whole lot of concern for short-term market value movements. Market value performance evaluation techniques are only used to analyze peak-to-peak market cycle movements over significant time periods.
Security market values are used for buy and sell decision-making. Working capital figures are used for asset allocation and diversification calculations. Portfolio working capital growth numbers are used to evaluate goal directed management decisions over shorter periods of time.
WCM tracking techniques help investors focus on long term growth producers like capital gains, dividends, and interest— the things that can keep the working capital line (see Part One) moving ever upward. The base income and cumulative realized capital gains lines are the most important WCM growth engines.
The Base Income Line tracks the total dividends and interest received each year. It will always move upward if you are managing your equity vs. fixed income asset allocation properly. Without adequate base income: 1) working capital will not grow normally during corrections and 2) there won’t be enough cash flow to take advantage of new investment opportunities.
The earlier you start tracking your dependable base income, the sooner you will discover that your retirement comfort level has little to do with portfolio market value.
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