Investment Performance Expectations and Broker Account Statements

As impossible as it is to predict the future of the markets, it's relatively easy to anticipate what you are going to experience when you view your next brokerage account statement.

Whether you go the discount route through Schwab, Ameritrade, Fidelity, etc., or enjoy a higher level of service through an independent Market Cycle Investment Management(MCIM) professional like LMK Wealth Management, you should never be surprised by the market values reflected on your monthly statement.

None of the firms make it easy for you to examine asset allocation, particularly on a working capital model (WCM) basis, and most refuse to even acknowledge that Municipal CEFs should not be lumped in with the equities. Additionally, no brokerage statement ever includes a warning label about the dangers of margin borrowing. Surprised? Not.

But you can be sure that all statements will emphasize (in every conceivable way) the short-term change in your market value. Any long term or cyclical analysis (if any) is reserved for the "we understand your long term objectives" propaganda that fills their prospect-only glossies.

Statement market value movements in both directions need to be anticipated and understood, not labeled bad or good (rhyming not intended). Investigation is required when you reasonably expect one direction and you wind up with another--- with the emphasis on the reasonableness of your expectations.

Someone should provide a simple analytical mechanism that will allow investors to know precisely what to expect from the monthly statement opening ritual--- and to have a fairly good idea of why the values have changed the way they have. No shocks, surprises, or indigestion.

The Investment Grade Value Stock Index website takes a respectable shot at it, but you should know that IGVSs are those few "value stocks" (in the classic definition) that are also B+ or better rated by S & P, dividend paying, generally profitable, and traded on the New York Stock Exchange --- a very elite crew indeed, and not represented well in most Mutual Funds, ETFs, or other derivative concoctions.

The IGVS expectation analysis process will prepare you for the dreaded monthly account statement --- whether you get there by password and click or by post office and letter opener. Only four bits of information are really needed (for MCIM users), and I'm assuming a 70% to 30% portfolio asset allocation --- equities vs. income, respectively.

One: An increasing Investment Grade Value Stock Index (IGVSI) will lead to higher market values for the stocks in your portfolio, but not if you own Mutual Funds and ETFs.

Two: When you are looking for stocks that fit your buying parameters (not hot tips from "Heard on the Street", "Mad Money" or CNBC), a higher number of "bargains" on the "Bargain Stock Monitor" will generally mean lower equity market values.

Three: If monthly (IGVS) Issue Breadth numbers are significantly positive, higher market values should be expected. For the uninitiated, issue breadth analysis compares the daily number of stocks going up in price with the number going down. 

Four: If there are fewer IGVSs establishing new 52-week lows than new 52-week highs, it is likely that overall equity market values are rising.

So how do you think you did last month --- click, click, head-scratch?

If the Investment Grade Value Stock Index is up for the fifth time in the past six months. If the number of bargain stocks was below the average of the past six months. If issue breadth was positive. If there were more 52-week highs than lows.  Well, what should your statement reflect?

With all indicators pointing to a higher market value than most previous months, a continuation of the upward trend in market values would be expected --- in spite of the media's inordinate "doom and gloom" focus --- maybe they are stuck in mutual funds and derivatives as well.

Additionally (and also reported upon on the IGVSI website), in spite of conditions where interest rates cannot really go much lower, interest rate sensitive CEFs continued to move slightly higher--- signaling further strengthening (for now) in the credit markets.

So what could keep you from having a better portfolio picture this month than last (from a short-sighted market value perspective)?

Well, Virginia, in the non-government world where most of us attempt to survive, disbursements in excess of income and deposits will do it every time. And when the market corrects, as it absolutely always will to some extent, the double whammy on the bottom line can be painful.

Tracking breadth, new highs and lows, bargain numbers, and an index that mirrors the types of securities you hold in your portfolio, can explain what is happening. Regular additions to your portfolio can soften the impact of a correction and help you prepare for the rally that inevitably follows.

Now if we could only convince the SEC to require that account statements be divided by security purpose (growth or income, for example) instead of by trading unit.

And market cycle analysis--- maybe next year.