Our most recent newsletter indicated that a correction was likely. Is the selling of yesterday and today the start of the long-awaited correction to the great start this year? With just over an hour left in trading, a few significant trading levels have been breached. For the S&P, the 20 day moving average at 1507 was crossed early in the trading session and the Dow has fallen below the psychologically important 14,000 level with yesterday's losses. The S&P was below 1500 earlier today but is trying to rally back above that important level. Often, the last 30 minutes of trading gives a good indication of where the market wants to go so we will be watching the close carefully. The bulls will need to finish with some strength in order to quell the losses. As we have discussed recently, a correction along the lines of 5-7% would be normal considering the recent advance and, indeed, would be healthy for the longer term prospects of the market as it would give a good entry point for some of the money still left on the sidelines.
Many in the financial press are pointing to the release of the Federal Reserve minutes yesterday as the cause for the recent selling. While the minutes were a little unsettling as some of the members indicated disagreement with the continued easy money provided by the Fed, we don't believe the minutes were all that significant but rather just a reason for those nervous about the steep rise in the markets to take some of their profits.
Watch the close for whether or not the correction has started or if this is just a little profit taking.
Welcome to the extended version of the BAM Market Note. We are not bloggers by nature but have had clients and friends inquire about our thoughts on the market in between our newsletters. The number and content of posts will likely be determined by the conditions of the markets and the interests of our readers. We would greatly appreciate your feedback and comments.
Thursday, February 21, 2013
WHY ACTIVE MANAGEMENT?
In times when the market is moving up on a steady basis, we are often
asked why not just use a buy and hold approach? It is a very good
question and one that the financial media often espouses. It should be
noted that the financial media is largely supported by the advertising
dollars of the financial industry which would love nothing more than for
investors to buy their funds and hold to perpetuity! However, not to
be completely jaded, let's take a look to see if the buy and hold mantra
holds true in actual real life situations.
Let's say that an investor has $100 to invest and an 8 year time frame. Furthermore, let's assume that the markets follow the usual trend of 3 up years for every 1 down year.
The market returns are:
Yr. 1 10%
Yr. 2 5%
Yr. 3 15%
Yr. 4 -25%
Yr. 5 15%
Yr. 6 5%
Yr. 7 15%
Yr. 8 -15%
Adding up the returns it appears that you have made 25%. However, the math works much differently.
In actuality, because of the effect of losses on the portfolio, the value has gained only 17.58% over the 8 years. Furthermore, it does not matter in which year the losses occur - the results remain the same.
With active management, the advisor seeks to capture some portion of the gains while avoiding the losses. What would happen if an investment professional were able to capture 75%, 60%, 50% and 40% of the gains in the up markets while avoiding 75% of the down markets?
75% 60% 50% 40%
As you can see from the table above, capturing as little as 40% of the gains in the up years would yield almost the same level of portfolio gains over the 8 years as a buy and hold investor. Furthermore, a huge benefit of the active management approach would be the lessened stress and ability to sleep through the bad markets without seeing your portfolio drift down 10, 15 or 25% not to mention the unfortunate investor that had a need for his/her assets in the midst of a bad year like year 4. Oftentimes, a picture is worth a thousand words.
So to answer the question posed by this post - why active management? Why would an investor choose any other way? Over time the benefits speak for themselves and Bills Asset Management has a 20 year history of effectively employing active management techniques.
Let's say that an investor has $100 to invest and an 8 year time frame. Furthermore, let's assume that the markets follow the usual trend of 3 up years for every 1 down year.
The market returns are:
Yr. 1 10%
Yr. 2 5%
Yr. 3 15%
Yr. 4 -25%
Yr. 5 15%
Yr. 6 5%
Yr. 7 15%
Yr. 8 -15%
Adding up the returns it appears that you have made 25%. However, the math works much differently.
| Yr 1 | $110.00 | |||||
| Yr 2 | $115.50 | |||||
| Yr 3 | $132.83 | |||||
| Yr 4 | $99.62 | |||||
| Yr 5 | $114.56 | |||||
| Yr 6 | $120.29 | |||||
| Yr 7 | $138.33 | |||||
| Yr 8 | $117.58 |
In actuality, because of the effect of losses on the portfolio, the value has gained only 17.58% over the 8 years. Furthermore, it does not matter in which year the losses occur - the results remain the same.
With active management, the advisor seeks to capture some portion of the gains while avoiding the losses. What would happen if an investment professional were able to capture 75%, 60%, 50% and 40% of the gains in the up markets while avoiding 75% of the down markets?
75% 60% 50% 40%
| Yr 1 | 107.50 | 106.00 | 105.00 | 104.00 |
| Yr 2 | 111.53 | 109.18 | 107.63 | 106.08 |
| Yr 3 | 124.08 | 119.01 | 115.70 | 112.44 |
| Yr 4 | 116.32 | 111.57 | 108.47 | 105.42 |
| Yr 5 | 129.41 | 121.61 | 116.60 | 111.74 |
| Yr 6 | 134.26 | 125.26 | 119.52 | 113.98 |
| Yr 7 | 149.37 | 136.53 | 128.48 | 120.82 |
| Yr 8 | 143.77 | 131.41 | 123.66 | 116.28 |
So to answer the question posed by this post - why active management? Why would an investor choose any other way? Over time the benefits speak for themselves and Bills Asset Management has a 20 year history of effectively employing active management techniques.
Tuesday, February 19, 2013
Subscribe to:
Posts (Atom)