Janet Schlarbaum, Mark Schlarbaum Financial Success Tips

Author: 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.

If the change in a portfolio’s Market Value is really so important (the Working Capital Model would argue that it is not), why not do it over a period of time that recognizes where we happen to be, cyclically? Interest Rates have cycled seven or eight times over the past twenty-five years; the stock market has been nearly twice as volatile. Peak-to-peak analysis, although hindsightful, raises a type of question that can, at least, be portfolio personalized for analysis:

(1) Did my Equity portfolio grow in Market Value between January 2000 and January of 2002, or between January 2002 and either January 2004 or June of 2006? These were cycles on the DJIA, which at its high in June 2006, was still below the ATH established in early 2000. These are meaningful time periods that can be used to study the effectiveness of various equity-only portfolio strategies. S & P 500 cycles were pretty much the same.

(2) Does my Income Portfolio generate more income today than it did the last time interest rates were at these levels is still the most important question that should be raised… regardless of Market Value. Sorry.

But as important as it may be to determine the answers to such questions, it is equally important to understand why the results were what they were. Did I withdraw money from the portfolio, or take losses on investment grade securities for tax reasons? Did I fail to follow the plan, or lose control of my Asset Allocation? Did I change variable expenses into fixed expenses or allow tax considerations to keep me from realizing profits. Were there changes in the investment markets that would make peak-to-peak analysis less meaningful than in the past?

So by taking away the move-your-money, racetrack, mentality that runs today’s investment performance evaluation methodologies, we create a calmer, more cerebral, management exercise with which to tweak our investment strategy. We may have gone backwards because we stayed on the sidelines instead of buying when prices were low. It may have been the strategy, it may have been the management, it could have been the diversification formula, or the buy-sell-hold decision-making rules. It may even have been the fear or greed that influenced our judgment. By looking at things cyclically, and analytically, instead of celestially and emotionally, we either allow our strategy to prove itself over a reasonable period of time or obtain the information needed to change it constructively.

Article Provided By: Janet Schlarbaum

Article Suggested By: Janet Schlarbaum

Author: Jon Provencher

It can be very alluring to whip your credit card out of your wallet in order to take advantage of a great trade opportunity in your preferred Forex trading strategy. However, prior to taking that credit card out, consider that unless you use sensible money management you could empty your account faster than you think.

No form of investment is a guaranteed money maker and Forex is not an exception. As a matter of fact due to the amount of leverage given to traders and investors in the Forex market, greed can quickly take over and all commonsense is thrown out the window. Experienced investors and traders know that some of their trades, even up to half of their trades, will not make money. The reason they are successful is that they have a sensible money management strategy so when they do lose it doesn’t leave them broke.

In any Forex trading strategy, there will be a drawdown. The trouble is, we don’t know when the drawdown will begin. If a Forex trading strategy proves it is 80% successful, that means around 20 out of every 100 trades will not be successful. If those 20 trades happened all in a row (yes, it can happen!) your account could be completely emptied if you aren’t using sensible money management and you wouldn’t be able to continue trading the strategy for the next 80 potentially profitable trades.

Some aggressive Forex traders claim that the only way to accumulate enormous profits fast is to risk more of your money. While this may be true, it’s also the fastest way to lose all your money and should really be considered as gambling. There are many stories out there of those that made their first million trading Forex and then lost it. The most successful Forex traders and investors did not get rich quick, they took a slow and steady approach and learnt to make money trading Forex for the long-term.

An experienced Forex trader only risks a limited percentage of their trading money on each trade. The profits will not be as large as those of the aggressive trader, but when the drawdown hits, the Forex trader practising sensible money management will be more ready to survive the storm.

Of course, building up capital slowly doesn’t sound like an exciting strategy. But, you’re in the Forex market to generate consistent profits, not for quick thrills. If you’re not using sensible money management when investing and trading the Forex market, you are essentially gambling. Even professionals that make their living playing poker and other casino games use some sort of money management strategy. They know that they can’t win every single tournament or game they enter, so they only risk a limited amount of their bankroll on each one. This allows them to recover much more quickly when a losing streak hits.