Modern Investment Thinking: We've Come Full Circle

The simple process of taking a person's risk tolerance (+ other data) input and creating a goal directed division between equity and income securities has been replaced by too many cross-purposed modifications than can be presented here.

But the very idea that the object percentages are to be either: (a) re-balanced annually based upon changes in market value, (b) changed randomly based on the managers' assessment of the future, or (c) ignored entirely --- well, it just boggles the experienced investment managerial mind.

The purpose of an asset allocation formula is to direct the long-term investment plan --- the equity to income ratio is maintained decision by decision, trade by trade, throughout time. Using the Working Capital Model, there is no need for rebalancing ever, and Tactical Asset Allocation (the "let's guess the future of one sector or emerging market" approach) is pure speculation.

Market Cycle Investment Management is a 40 year old + body of investment management thought that employs: cost based asset allocation and diversification; cyclical performance evaluation using meaningful benchmarks; standardized quality assessment, income production requirements, and manageable buy and sell disciplines.

Its asset allocation principles distinguish only between equity-purpose and income-purpose investments. It has succeeded for decades by embracing the market cycle, preparing for it, and by growing the income that will be needed at a distinctly discernable time in the future. No special mathematical skills or fancy footwork required.

It's competition is a mass of Exchange Traded Index Funds whose raison d'etre is the assumtion that fund managers are incapable of "beating" the market indices. Thus, passive is better --- even though they have no chance at all, by design, of beating their benchmarks.

In fact, managers outperform the S & P 500, etc., all the time --- just not open end mutual fund managers. How's that you say?

Mutual Fund managers have to go with the flow as dictated by their unit holders. If the mob screams "SELL", they can't buy --- just ask Peter Lynch in October of 1987. If main street hollers "BUY at any price", their charters dictate that they have to do what they are told. During rallies, they can't even take profits and wait for a correction.

Of course these "managers" can't beat the market --- they are merely a reflection of the market. Not a managerial bone in their bodies. And this is the brilliance for a gazillion dollars occupying speculative havens in passive ETFs.

You just can't make this stuff up!

The Full Circle of Investment Thought

From the unmanaged "Buy and Hold" strategy of generations past, it's interesting to observe the full circle we've traveled to the unmanaged multi-product portfolio of the 21st century. Somewhere in the process, both technical and fundamental analytical techniques have been steamrolled under the pavement of the new highway to --- just what, actually.

We have gone from a process that valued ownership of financial assets and a discipline that encouraged personal responsibility for creating financial security to a product shopping mall environment of speculations based on probabilities and computer model projections of possible realities.

But in spite of the tremendous shift in financial focus (be it based on a fear of regulators or the greed of institutional fat cats), somehow, someway, the basic rules of the investment game have remained the same. A consistent approach to the mystery (technical, fundamental, or numerical voodoo) is a requirement.

And, as it always has been, if you can't see and/or understand what's inside, you're probably better off looking elsewhere. And those of you who own individual securities, in managed portfolios? Well, when it hits the fan again, and the passive cloak of darkness is unzipped, investigated, and the nonsense sent packing...

The folk with their eyes still open will come back to the building blocks, to stocks and bonds, to fundamental and technical analysis without the unnecessary creativity, to fiduciary responsibility, and to the QDI. (For those of you who have not read "The Brainwashing of the American Investor" , that's Quality, Diversification, & Income.)