January 27, 2012
The Key To High Returns Is A Disciplined Strategy
This article has been a real eye opener for me. Until today, I thought the key to high returns was investing in a truly prosperous economy.
For example, a balanced portfolio of 60% equity and 40% fixed income could become 70% equity and 30% fixed income after a strong stock market.
I'll start with a 1% guaranteed annual loss in 5-year inflation protected treasuries as my 40% fixed income portion. Better safe than sorry. I'll add on a 60% exposure to overpriced stocks. I'll then relax on the beach while awaiting my "high returns". Perfect!
Sounds crazy? Not at all! Livin' the dream!
On the off chance this doesn't work then the article does offer additional disciplined strategies. Using a shotgun approach, one of them is bound to hit my target.
As an example, if an investor believes that over the next year the U.S. equities market will be weak, the investor might decide to underweight his exposure to equities and overweight cash or bonds.
Yeah! Now that's what I call disciplined. The typical investor is generally known for his/her ability to time the markets. Genius!
Unlike a rebalancing strategy, which is mechanical, tactical asset allocation requires some forecasting ability to make the correct decisions.
Absolutely. That's why I refer to professionally trained economists such as Ben "There Is No Housing Bubble to Go Bust" Bernanke or Mark "I Caught the Falling Knife" Zandi for tactical asset allocation advice. Their forecasting ability is top notch. Don't go it alone!
Each type of strategy will have its proponents, but any logical, rational strategy that is followed consistently is always better than no strategy at all. The value is in the disciplined approach a strategy provides.
For example, "The Less I Play, The Less I Lose" strategy is one I would use in casinos. Great strategy. I highly recommend it. That said, the strategy does not exactly meet the "high returns" promise the article makes in the headline. Perhaps that's just an oversight.
The biggest challenge as an investor is to be able to filter out truly useful information from the needless noise.
I hear that. In fact, I was thinking this very thought as I continued to read the article. Amazing! I kept reading anyway though. I can't explain it. Perhaps I'm a glutton for punishment. In fact, I am wasting your time as well. Sorry about that! It isn't too late to stop. Seriously.
It is important to stick to your strengths and interests and delegate out the asset classes in which you have a limited expertise.
The typical investor no doubt considers his/her trading skills to be superior to the advanced automated trading systems over at Goldman Sachs. I think that's a given. The trick is to figure out where the typical investor has limited expertise. That's a tough one.
When delegating make sure you find an expert that has the following four traits. First, he/she must be at least as smart as the market overall. Second, he/she is willing to spend time talking to you instead of making the big bucks going it alone. Third, he/she must be willing to do this with little compensation from you. You don't want your "high returns" eaten up by expenses. And lastly, you want to find someone who would not lie to you about the first three traits they supposedly have. You don't want to end up being Bernie Madoff'd.
That person is a rare breed. Look hard! The mirror might be a good place to start. You could certainly do worse.
Having an investment strategy for both asset mix and security selection is important to ensure consistent success as an investor.
Indeed. If you have generic cookie cutter investment strategy found within many of the most popular investment books then you can't help but make "high returns" in this economy. As for consistency, I can't think of one disciplined typical investor who lost so much as a penny in the last downturn. Then again, I don't really get out much. I was probably too busy hoarding toilet paper.
Having the discipline to follow an investment strategy is more important than the actual strategy chosen.
Just pick one at random and stick with it. If that doesn't give you the "high returns" promised in the headline, what will?
Here's something I came across today that you might find interesting, and amusing.
ReplyDeleteThe economic chart that may doom the Obama presidency
What's interesting is the way that the author uses a chart with an exponential trend line. It reminded me alot of your "missing jobs" posts and the way that you can amplify the effect by laying down the exp. trend line only up to a certain point while leaving the rest of the data to fall below the line.
It's an effective way to make a point and as you can see the author in the link I provided has seen the value in using it too.
I've decided to go with an old and proven stock market strategy, which dates back at least to Will Rogers:
ReplyDelete"The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it's not going to go up, don't buy it!"
If only I can find the discipline to follow it...
"...proven stock market strategy...If it's not going to go up, don't buy it!"
ReplyDeleteAnd if QE makes "it" go up?
"Having the discipline to follow an investment strategy is more important than the actual strategy chosen."
ReplyDeleteSay what? So holding on to all my dotcom stocks, which I loaded up on when the market crashed in March 2000, was a genius move on my part?
I am so reassured. I was beginning to think my disciplined approach would not pay off. I am a disciplined long-term investor, and I do not need to reassess, or kowtow to reality...following my buy 'em when they crash strategy to the bitter end will ensure my happy retirement.
Fritz_O,
ReplyDeleteI am interested and amused. You were right.
The main reason I do it the way I do is to show the true extent of the exponential trend failure.
Consider this. If I use all the data then eventually the data will return to the exponential trend line. It must. The reason is that the data must spend roughly the same amount of time above the trend line as it does below it (in order for the trend line to make any sense).
Even if the data no longer rises then it still must resume the exponential trend. It just won't be the same trend. The exponential trend line will simply come down to meet the new stagnant data points.
In other words, there can never truly be an exponential trend failure if one uses all of the data. The trend simply gets dragged down. Of course, that's not very useful. What we really want to know is how much the trend that was established in healthier economic times has changed/failed.
The best way, at least in my opinion, to do this is to only use the data up to the point of failure. All data past that point is then considered to be "failure" data.
It's funny. I didn't do this in my original charts. It takes more work to do it and I'm generally a lazy person. It wasn't until multiple exponential trends began to fail that I decided it was worth the extra work. It is now to the point where I seem to use it in most charts. Sigh.
Parker Bohn,
ReplyDeleteHere's my favorite Will Rogers quote. I might be a bit biased though.
The nation is prosperous on the whole, but how much prosperity is there in a hole? - Will Rogers
We're determined to find out.
fried,
ReplyDeleteYou could always protect against that outcome by buying "bitter end" derivatives.
I saw a comic strip once that described how, using derivatives, one could drastically reduce the risk of a stock market portfolio.
It was very amusing. The ending went something like this.
Client: So I will basically be earning a treasury yield?
Broker: Yeah, pretty much.
My first thought was that it would be a treasury yield with parasitic commissions, fees, and counterparty risk (not backed by the "full faith and credit of the US government").
This was before the "disciplined" structured investment vehicle fiasco, so I find it even more amusing now of course.
Excellent response. I enjoyed reading your thoughts on the charting.
ReplyDeleteSo today, I find this: U.S. Economy Picks Up Steam.
I wonder...am I just now spotting these instances of exponential-trend-line charting outside of IOP, or, are they now being used more often in the "new economy"? I tend to think that it's the latter. And I also wonder where so many journalists got the idea! ;)
Notice the far right example "Household sector spending on goods and services...". Ouch, that looks alot like the employment trend. Shocking, I tell you!
"It wasn't until multiple exponential trends began to fail that I decided it was worth the extra work."
Werd.
It wasn't until Ben Bernanke began to fail multiple times that I decided [investing] wasn't worth the extra risk.
Fritz_O,
ReplyDeleteI suspect that we are seeing more of these exponential trend charting techniques in recent years simply because there have been *so* many major exponential trend failures in the last decade.
And when I say failure I mean that there is zero chance that we will *ever* return to the former trend. For example, I am 100% confident that the 39.5 million missing jobs problem is not a cyclical one that can be healed even through a miraculous unforeseen event.
"I am 100% confident that the 39.5 million missing jobs problem is not a cyclical one that can be healed even through a miraculous unforeseen event."
ReplyDeleteI'm with you on this. What I find so extraordinary/fascinating/unbelievable is the sheer number of "pundits" that point to the "failures" that have occured in the past three years and suggest that somehow it is solely and completely the fault of the current White House occupant and "his" policies!
Nevermind the fact that those "failures" did not begin exactly on Jan. 20, 2009. And nevermind that the failures will not "be healed" like you said.
Romney's accension is a study in "blind trust"'s.
Politician's have wives because they are the executor's of the family's blind trusts.
*AND*
The media feeds the average American a steady nourishing diet of blind trust.
Fritz_O,
ReplyDeleteWhat I find so extraordinary/fascinating/unbelievable is the sheer number of "pundits" that point to the "failures" that have occured in the past three years and suggest that somehow it is solely and completely the fault of the current White House occupant and "his" policies!
For what it is worth, I find it sickening/discouraging/depressing.
We ignore the disease and then continue to blame the symptoms.
A healthy economy cannot require exponential growth in order to prosper, for eventually exponential growth must fail. It is a mathematical certainty.