How's Your Investment Portfolio Doing? --- Seven Long-Term Analyzers

Before Wall Street and the media combined to make investors think of calendar quarters as "short-term" and single years as "long-term", market cycles were used as true tests of investment strategies over the long haul. Bor-ing.

The standard analytical tools used by most financial institutions were Peak-to-Peak and Peak-to-Trough performance comparisons with either the DJIA, the S & P 500, or both. Purpose and perspective were also different, with a focus on portfolio results vs. reasonable expectations. Even more boring, and not nearly as profitable for "the wizards" as today's super-trifecta, instant gratification, mentality.

Portfolio performance analysis was a test of management style and overall methodology, not a calendar year horse race with one of the popular averages. No real-life, personalized, portfolio should ever be a mirror image of any other, or comparable to any particular market index. Analysis should be of process, content, and operating strategy; the objective should be fine-tuning of either the philosophy or the discipline.

If the portfolio market value, in a Peak-to-Trough scenario, fell by a greater percent than the benchmark(s), the overall approach would be looked at for reasons why. Was there excess speculation? Did interim profits go unrealized? Was an issue or a sector over-weighted? Is a change in approach warranted?

Theoretically, portfolios with 30% or more committed to income securities should fall less in market value than 100% equity portfolios --- they would also be expected to rise less than their more speculative brethren in a Peak-to-Peak analysis. Formulating valid expectations is imperative for long-term investment success, and sanity.

November 1999 to March 2009 would have been the ideal analytical period for a Peak-to-Trough review of MCIM (Market Cycle Investment Management) portfolios, and November '99 through February 2013 is perhaps the ultimate Peak-to-Peak yardstick.

Here are seven tests you can use to determine how your investment portfolios (or your clients' portfolios) have fared since the stock market peaked toward the end of 1999, using a 60% Equity/40% Income CEF, MCIM asset allocation as an expectation producing benchmark.

1) The S & P 500 fell about 33% from 11/99 thru 05/09. MCIM portfolios were up by a larger number (see spreadsheet), and you?

2) "Smart cash" should have been huge toward the end of 1999 and significant in mid-2007, reflecting excessively high IGVSI stock prices. Then, portfolio smart cash should have been shrinking to nearly zero (while equity prices tanked) through the second quarter of 2009. What is your smart cash level right now, at this (Feb 2013) stock market all time high?

3) Planned disbursements for expenses should have continued unabated throughout the entire fourteen year period without ever the need to sell any securities, or to reduce payment amounts--- except in (client) emergency circumstances. Was this your biggest disappointment?

4) Portfolio market values should have rebounded to a greater extent (closer to the most recent all time high) than the gain in the S & P average relative to its latest ATH --- after both the dot.com bubble debacle and the latest financial meltdown. Be truthful now; was it this good?

Actually, the dot.com fiasco was pretty much of a non-event for MCIM portfolios because of disciplined operating rules which boil down to: "no IPOs, no NASDAQ, no Mutual Funds, no problem". This time around, the "problem" was a congressional stake in the hearts of what once were some of the best of the best financial institutions.

Incidentally, the congressional brain trust failed in "teaching a lesson" to the totally overpaid corporate executives on their hit list. Instead, they succeeded in pulverizing the market values of virtually every 401(k) account in the country. Term limits anyone?

5) Portfolio "working capital" should be higher than it was at its peak in 2007, adjusted for net additions and withdrawals, and possibly about twice the level anytime in 1999.

6) Total portfolio "base income" should be higher than it was in mid-2007, again adjusted for net portfolio additions and withdrawals (and drastic asset allocation changes) --- but the 2007 base income level would have been significantly above that in 1999.

7) Finally, there should not have been any major profits left on the table, on any security, of any kind, in any portfolio throughout the fourteen-year period.

I propose a toast to the really-not-so-boring MCIM strategy --- an approach that has actually worked pretty well (for easy to understand and to implement reasons) through the three major financial market meltdowns of our lifetimes.... really.