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Market Cycle Investment Management
By: Steve
Selengut
Whatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did Wall Street get away with pushing
these facts of financial life down the basement stairs? Most investors, I'm beginning to believe, and all financial advisors, media
representatives, and market gurus have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field...
simple, yes; realistic, not. I have to wonder if things would be different with a more investor-friendly tax-code, but that would be far less
lucrative for The Wizards...
Investing with a calendar year focus has no basis in the realities of finance, business, or economics... isn't it obvious that the Stock and Bond
Markets are far more closely related to the Business Cycle than to the Earth's around the Sun? Investopedia reports that, during the last sixty
years, most business cycles have lasted three to five years from peak-to-peak. The Stock Market Cycle (in terms of the S & P 500 Average) is
the period of time between the two latest highs of that average which are separated by at least a 15% decline in the average. The second high
needs only to be 15% above the nadir, it doesn't have to represent a new All Time High (ATH). Interest rates (based on the 10 Year Treasury
Bond), seem to cycle in the two to five year range, and are much more closely related to Business or Economic cycles than they are to the Stock
Market Cycle. Confused?
Well, you should be. Although they are closely intertwined, none of these financial realities are predictable and, therefore, need to be dealt
with as hindsightful tools in the performance analysis process... a process that needs to be undertaken using personalized expectations. How many
times in the last 20 years do you think that any of these cycles peaked on a December 31st? The "I'll try this approach for a year or so and then
change if it doesn't work out better than everything else" mentality, combined with a regressive tax code that rewards losses more than gains,
has killed cyclical analysis dead. It's time to get back on our hogs and try something old. Let's re-cycle peak-to-peak analysis like we do
plastics and paper products. It might just put more "green" in our retirement programs. As recently as 1980, Separate Account (the first Mutual
Funds) Investment Managers were reporting fund performance in terms of income generation and peak-to-peak growth in Market Value. But that was
before investing became the number-two spectator sport in America.
Few investment professionals would argue with the observation that a viable investment program begins with the development of a realistic plan,
and most would agree that investment planning requires the identification of long-term personal goals and objectives. Some experts would even
agree that the end result should be a near autopilot, long-term and increasing, retirement income. Asset Allocation is used to organize and
control the structure of the portfolio so that it operates in a goal directed manner. Is this easy or what! It would be if the average investor
would just let things alone long enough for them to work out according to the plan. That's the rub. Wall Street, the financial media, and
financial professionals (including CPAs) have no interest in letting things work out according to plan... even if it's a plan that they
designed.
Is it clear that calendar year performance evaluation allows an average of just six months for an equity selection to 'perform'? Is it clear that
the change in Market Value of an income security over the course of a year is meaningless? Is it clear that a portfolio containing both types of
securities cannot be compared with an average or index that is comprised of just one or the other? It is crystal clear until it's your portfolio
that has had the audacity to shrink in Market Value over the course of the year! Human nature is predictable but not necessarily rational. Mother
Nature's financial twin's twisted sense of humor, though, is both... and totally unrelated to third rock movements.
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