What to do when the numbers do not tell the whole story.

by Ken Rupert. 0 Comments


Five years ago investors had shaken off the financial damage done during the September 11th attacks and had experienced an incredible amount of growth in the markets. In October of 2007 the Dow had reached its high of 14,066. By August 11th, 2008 the Dow was experiencing the pressure associated with the credit crunch. It was off by about 2,400 points in a little less than a year. Between September 8, 2008 and March 2, 2009 the Dow dropped over 5,000 points to close at 6,626, effectively wiping out the savings of many average Americans.

Since that time, the Dow has climbed back to the 13,500 point mark. However, if you were one of the investors who pulled what little retirement savings you had left in the market during the down-turns, chances are you have not recovered your wealth. This can present a problem if you are near or in retirement. Even if you are not near or in retirement, how would skittish investors re-enter the market when there is so much volatility? For me, there are three things investors should consider doing in these volatile times. Regardless of whether you left the market and are contemplating re-enter it, are thinking about entering the market for the first time, or are trying to determine where to go from here, these three things are a must.

The first thing that you must do is to fully develop a strategy. This might seem to be an obvious step, but it is amazing how many people fail to see the big picture. One of the aspects of fully developing a strategy is to understand the downstream effects of each decision you make. If you have ever waded through a stream you will notice that when you stir-up the sediment at your present location, it clouds the water “downstream”. When I was a kid I used to catch crawfish with my brothers. No, I wouldn’t use my brothers for bait (although at times that thought did cross my mind). Many sunny afternoons you could find us on a stream hunting crawfish. I was the one who always wandered upstream because I knew that as I hunted upstream in clear waters, my brothers were hunting downstream in murky waters.

Using that mental picture, when you make a mistake in judgment or direction at the present moment, you need to consider the manifestations that can develop downstream. Obviously, making a decision to re-enter the market, or enter the market for the first time, without considering the strength or weakness of a sector or industry can result in a gain or loss of wealth; so understanding market trends as they currently exist is critically important. However, I like to use the “Wayne Gretzky” philosophy which states: “I skate to where the puck is going to be, not where it has been.” This is a forward-looking, proactive approach to life.

As important as it is to understand current market trends, your strategy should take you to where the puck is going to be, not where it has been. I teach my clients how to anticipate sector and industry strength so that they can make better decisions about their investment directions. In order to do this you have to read the indicators that are not always so evident. Through 2010-2011 Royalty Trust stocks were providing a combination of dividend and capital gain returns that were very attractive. In some cases over 12% returns. Lately, however, that has turned to just good dividend returns.

In contrast, REITs (real estate investment trusts) have been providing both dividend gains and the potential for large capital gains returns. As long as interest rates stay artificially low the REIT will provide a good jumping in point. However, if you are forward-thinking you will know when to anticipate the day that REITs will fall out of favor based on rising interest rates and inflationary pressures. Being able to see this allows you to adjust your strategy and move out of the invest vehicle having collected a decent return.

In addition to teaching about sector and industry strength, I also teach my clients about income modeling, budget structure and prioritization, and vision, mission & purpose development. The concept of having a fully developed strategy requires you to consider all of the downstream effects of your decisions, judgments, and current direction. Going back to my days of hunting crawfish, since I could see the smaller crawfish in the clearer waters, I would end up with a larger volume of crawfish in my bucket. The little ones would elude my brothers in the murky waters.

This would be the second thing to consider whether you are contemplating re-enter the market, thinking about entering the market for the first time, or are trying to determine where to go from here. Understand that a lot of little wins can out-pace a few big wins. Rosabeth Moss Kanter says “I've found that small wins, small projects, small differences often make huge differences.” If you have left the market by pulling back into cash or bonds, do not think that you have to re-enter the market in the same fashion. Be willing to buy in and sell out at a different pace. Capturing a capital gain after the ex-dividend date can increase your volume of wins.

So first develop a complete strategy for entry, re-enter, or future moves. This would actually include developing an exit strategy if conditions once again proved to be unbearable for you. If you left the market quickly because of fear, do not re-enter with gusto. Be methodical – that is, have a strategy that is in the style of and having the form or character of a method. If you are a mutual fund junkie you would use the dollar-cost-averaging method. Buy consistently, over a long period of time, and reinvest all dividends and capital gains.

When it comes to stocks, I teach a method of “buying into” a stock method. This simply means that after you have researched a security, and have considered the market and industry’s potential for growth, (the “where the puck is going to be” philosophy), you would make systematic purchases of the stock over a long period of time. The “buying into” a stock method could mean that you make additional purchases on the ex-dividend date of a stock. This would result in you purchasing additional shares at the ex-dividend price, building your return each quarter.

With preferred stocks, closed end mutual funds, and exchange traded funds I recommend looking for ones that are trading below the call price or NAV (net average value) respectively. All of these little wins eventually make a huge difference over the long run. The key to making any strategy successful is to be consistent. Great strategies that are poorly executed will produce poor results. Developing your strategy to incorporate the idea that little wins move you towards success will pay big dividends over the course of time.

The third thing to consider when entering, re-entering, or moving forward in the market is to develop a tracking mechanism that provides you feedback on your success. When you can track you success you can determine if and when you need to make adjustments to increase your opportunity to succeed. I use a monthly tracker developed to record the value of all of my accounts at an individual level. This tracker captures the monthly numbers and totals those accounts. December of the previous year is the base line of which the rest of the year is measured against.

Catching crawfish with my brothers always started and ended up as a competition. The goal was to catch the most crawfish in a set amount of time. Being the youngest, I gloried in beating my older brothers in anything I did. To catch the most crawfish meant that I was more effective and efficient at executing on the process of catching crawfish. Executing your strategy needs to be measured against some delta. Developing a scoreboard will take on the dynamics of your situation and personality.

Whether you are entering the market, re-entering it, or moving forward, your scoreboard should capture your capital investment. I use a detailed tracking device that records gross income, taxes, company sponsored benefits costs, and investment commitments (such as 401k, employee stock purchase programs & HSA accounts, etc.). This tracker captures the week’s activities and measures the running totals against a pre-determined annual goal. Part of the smart goal process is measurement. Having a tracking mechanism in place is a must in order to be successful.

Regardless of the numbers of how the market moves, having a strategy to take advantage of the market requires three key aspects for success. You must have a fully developed strategy that considers the downstream effects of each of the decisions you make. This takes into account predictive market dynamics and includes a bull, bear, and exit strategy. Remember, learn to skate to where the puck is going to be.

You also need to become comfortable with numerous little wins. Understand that you most likely do not have the vast amount of resources that the big investment companies possess. Be willing to settle for small wins in high volumes instead of big wins in low volumes. It is not HOW you can grow your investment by 13.5 percent; it is THAT you grow your investment by 13.5 percent.

Finally, develop and consistently track the metrics that show you that you are winning. There is nothing more powerful than seeing your success. Do not get too caught up in micro-managing the numbers. Track the macro numbers. You just need to know that month over month your net worth is increasing. It does not matter if the individual accounts fluctuate, what is important is that in big picture continues to grow.

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