“The One Horseman of Notre Dame”? 5 of 5

After an upset victory over Army’s football team, four of the victorious Notre Dame football players were tagged by a sports reporter with the moniker “The Four Horsemen of Notre Dame”.  A publicity agent took the picture and the legend was born for the four players who would eventually all find their way to the Hall of Fame.

In the final blog of a five part series we emphasize the sports reporter did not think to use the term The One Horseman, The Two Horsemen nor The Three Horsemen.  All four players were integral to the team’s overall success.  The four together possessed the speed, defensive skill, acceleration, passing skill and brains to win many football games.

This series examines our “four horsemen” portfolio strategies for use in a troubled economy:

Buy yield – fixed income

Forward valuation – growth plus fixed income

Joe DiMaggio streak – market timing

Flying under the Radar – growth for larger portfolios

A troubling trend has been the increasing number of investors asking our opinion on “all or nothing” “one horse” investments (e.g. high surrender indexed annuities, non-liquid real estate partnerships, etc.).  One must go back to the zany tax-shelters last seen in the 1970s to find such a willingness on the part of these investors to voluntarily surrender their investment maneuverability in order to be sold the peace of mind found on glossy advertising brochures.

In an effort to preserve investment maneuverability, an investor should urge their advisor to consider using multiple investment vehicles such as these “four horsemen” to match their risk-return profile to a suitable mixture of portfolio management strategies.

Buy yield – fixed income

Pros:

Known return (if held to maturity)

Historically, less principal volatility

Cons:

Lower investment yield

Many yields are less than projected inflation rates

Forward valuation – growth plus fixed income

Pros:

Higher return over past five years than fixed income alone

Zero trading friction with $0 commission on many ETF investments

Cons:

Over 20% principal drop in 2008-09

Popularity of ETFs means investments must be closely monitored by your advisor

Joe DiMaggio streak – market timing

Pros:

Market timing strategies beat return for popular S&P 500 index buy-and-hold strategies

Demonstrates record of avoiding brunt of big market selloffs

Cons:

Growing popularity may lead to diminishing relative advantage

Flying under the Radar – growth for larger portfolios

Pros:

Superior long-term returns over 2005-2010 test period

Reduced correlation to institution induced broad market swings over test period

Cons:

Trading commissions means best results appear for larger portfolios

Can be volatile at the individual security level; greater loss than fixed income during 2008-09

 

Concluding remarks:

If there is one word that will find its way into the description of what proves to be the winning investment strategy for 2011, we would suggest the word:

…Flexibility

The investment market of 2010 reacts to federal government intervention with unexpected swings.  Intervention of this sort has a track record of resulting in unexpected consequences.  Hume wrote: “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”  Stay flexible; adapt to the unexpected.

However before an investor ducks and covers their investment portfolio in our Atomic Rome with “safe” bonds, we caution that a “One Horseman” of fixed income might lose money on an inflation-adjusted basis; albeit at perhaps lowered principal volatility.

Add some growth at least until it hurts

Work with your advisor to add potential growth investments until your risk-return profile is fully utilized.

For owners of larger portfolio, consider direct security ownership to complement low-cost Exchange Traded Funds (ETFs) in an effort to lower dependence on institutional traders’ behavior and their sometimes unpredictable computer-guided trading patterns.

If you have questions or comments on how to prepare your investments in our Atomic Rome , let us know.  Reply to this blog or email us at arlingtonhall@comcast.net

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