Weekend Report
by Dr Invest

The past week broke market records from the lows to the highs. Friday, the market still seemed to be on an uptrend, but with the economic uncertainty in Europe, there was an overall nervousness in investors. Still, the "talking heads", with their poker-faces, made claims that the market would rebound and new highs would be set for 2012.

Let me repeat myself once again: "The market is the sole determinate of its price". It cares nothing of what I think, of what the President thinks, of what any economist thinks. When you jump in, you are like a cork in a stream, the stream will take you where it wants. One element of control you possess is that of determining when you want to get into the stream and when you want to get out of the stream.

Actively Managed Portfolio

An actively managed portfolio simply means that someone is taking advantage of market opportunities and BUYING when they are apparent; the same person is SELLING when the market is declining.

The reason that people don't actively manage their portfolios is because of “the fear of failure”. The surprise here is that there are many people actively managing their own portfolios, cutting out the investment adviser's 2% and beating the market.

If you choose to go with an investment adviser, ask him to give you five of his actual portfolios that are beating the Dow and S&P over the past five years. He doesn't need to name his clients, but he does need to show you his performance. Let him know that you are not interested in what an investment instrument should do, you want to know what it did.

There are reasons why a “Buy and Hold” can't work in the present market conditions. The best way to see that is with a long-term chart of the market's behavior. What we see is that between 1975 and 2000, the “Buy and Hold” method would have been out standing. But look at the chart below and examine the behavior between 2000 and 2012.

You will find a less than desirable choppy market with big losses and big gains.

Every time the market falls you loose the original value. For example a $100,000 portfolio falls 30% and at the bottom your CORE investment is only $70,000.... now when the market recovers, you gain 30%. What is 30% of $70,000? Yes, your right, it is $21,000. So without adjustment of deflation or inflation, your ORIGINAL PORTFOLIO valued at $100,000 is now only worth $91,000. On the second dip, your portfolio looses 30%, falling to a value of $63,700. The market regains 30% yet again and your new portfolio value is $82,810.

We are getting setup for yet another fall in the market. John Hussman at <hussmanfunds.com> estimates the next fall in the market to be 30% or larger. At the next 30% drop in the market, your portfolio will be valued at $57,967. Assuming it recovers the 30% lost, your NEW PORTFOLIO BALANCE will be $75,357. Over an estimated 15 year period, you will have lost 25% of your portfolio's value and that is without adjusting the inflation.

One more point, a conservative estimate of inflation is 2% per year. Multiply 2 times 15 and your new loss will be 30% to inflation. So our final portfolio's value, inflation adjusted, is $52,750.

Oh, and did I mention the Finanical Adviser's fee of 2% per year. So take off another 30% for adviser's fees. You can't survive an investment that is steadily declining. The final question is... DO YOU WANT TO BUY AND HOLD?

My Approach

 First, if you need an Finanical Adviser at all, pay him an hourly fee. An adviser can be of great help in preparing an investment plan to achieve your financial goal. And my suggestion is that you DO NOT LET HIM SELL YOU ANYTHING. Sells equals earnings for your financial adviser and he will drain you with annual fees, hidden fees, and kick-backs from the companies that are now keeping your money. No matter how good the product he is selling sounds, IT IS NOT!

Second, get a TRADING METHOD. You need a method of investment that consistently works and if it doesn't, you need a new trading method. DO NOT BUT A TRADING METHOD OFF THE INTERNET. Academia is your best source. What methods have been tested by Business Schools and Universities? I am suggesting that as a begining investor that you buy the book "IVY PORTFOLIO" and learn how to use this system.

Third, NEVER LOSE MONEY. Use stop-sells to limit your losses. Before you ever buy an investment, determine how much you are willing to loose. Set your stop-sell at that point and always sell at that point if your investment continues to fall in value. On the other hand, if the investment rises in value (price), move your stop-sell higher.

My Example

 On the 2nd of May, I purchased  $1,111 of BOND FUNDS called: TIP and BND, putting a stop-sell 3% below the purchase price. By the end of May, this investment had gained 1.32%. I  purchased $1,111 more of TIP & BND the first of June which has decreased about .42%. So both May's purchase and June's purchase show an overall increase of .13%. (Go back to previous blogs to learn how to invest in the Ivy Portfolio.) My stop-sell is placed 3% below the purchase price of TIP and BND on the 1st of June.

I will make another purchase in July of $1,111 of TIP and BND, when a full 1/3 of my $10,000 portfolio will be invested into BOND FUNDS. If the price of TIP or BND moves below the 9 month simple moving average will I not purchase more and will sell what investments I have made into BOND FUNDS, unless the prices of TIP & BND rise above the 9 month simple moving average.

Look, had I invested my total $3,333 set aside for BOND FUNDS on June 1st, I would have lost .42% as of this date, but by having bought in stages, I still show a profit in my total BOND PORTFOLIO. I think in August and September, we will revisit the lows of 2011. So I expect that over the month of June, we will see bond funds rising and stocks continue to fall. Remember that BONDS don't move much up or down, so 1/2% per month is good. That returns 6% per year. I don't believe that this year the GNP will see 8% -10% growth. Even the FED predicts a tepid 2% growth in GNP. Bond ETFs should continue to grow modestly and I am expecting a growth of .89% to 1% monthly.  So eventhough I entered the BOND ETFs in MAY, I am still expecting a 6% to 9% return from TIP and BND by the end of 2012. (note: I invested a total 1/3 of my portfolio in May because I wasn't fearful of the risk. Still, you should see 6% in returns. <these are only estimations and you could lose money.>)

As always, the objective is to reduce risks, but raise gains. If the economy tanks, I will stay out of stocks in the fall, but it is most likely that stocks will come alive during the presidental election because of the hundreds of millions spent on the campaign, possible stimulus by Bernanke, and the seasonal gains from Halloween, Thanksgiving, and Christmas.

So the goal will be to place 1/3 of the $10,000 portfolio into stock ETFs in October, like VTI. Projected returns 8%-10% for a stock portfolio. Furthermore, some of the 1/3 held back in cash, may be invested into out performing seasonal stocks like FDO, DLTR, CATM, or PETM. These could move 10% to 14% or more. Other seasonal stocks could be identified.

OVER THE NEXT WEEK, I HOPE TO SHOW YOU WHAT YOU CAN DO WITH THE 1/3 CASH YOU ARE HOLDING IN YOUR PORTFOLIO. I will try to give you some CDs and Money Market Funds that will return some income back into your portfolio.

In such a volatile market, an 8% return on invested money would be commendable. Perhaps we can move that closer to 9%.

(note the above information is for entertainment purposes only and not to be used as investment advice.)