"What goes up must come down. 

            Spinning wheel got to go round..."

So says a popular song from the 1960s. David Clayton-Thomas was probably not thinking about portfolio theory when he wrote that lyric, but the cyclical nature of life can be recognized in most areas of discipline, including finance and economics.

To cite a recent example, many investors can confirm that what went up in 1999 did, indeed, come down in 2000. It was the year of the fall of the technology titans. The new economy was badly battered and bruised. Some investors suffered greatly in the net worth area.

Many investors have suffered losses because they thought being diversified meant owning Cisco Systems AND Amazon.com.  Some thought they would be able to recognize a bursting bubble in time to safely capture their profits, only to find that bubbles can burst very quickly, and profits can become losses faster than you can say, "Yahoo!"   Many investors suffer because they are unaware of strategies for reducing risk.

Did you know that you can now use the same strategy that pension managers have employed for decades to help get maximum return with minimum risk? It’s called efficient diversification, and it was developed by Harry Markowitz, PhD., who won a Nobel Prize for his work.  Pension managers, who are responsible for wisely investing billions of retirement dollars, have used this strategy for more than 30 years. We’ve been using this technique for the benefit of our clients since 1989.  

The idea, put very simply, is that some asset classes tend to move up when others move down. A good example of this relationship would be the airline industry and the oil/gas industry. When oil/gas prices are stable or moving down, airline profits (and airline stock prices) tend to go up. When oil/gas prices (and profits) move up, airline profits tend to move down.  [more]

Of course, economic conditions are constantly changing, and, therefore, what went down can, eventually go up, and what was up can come down. The matter gets more complicated as new and different situations and factors enter the picture. Some companies never recover, and new ones are born. But the basic axiom of cyclicality remains nonetheless.

Inefficient diversification can screw up your plans.

Do you know anyone who has had to postpone retirement, or whose retirement income was greatly reduced because his or her investment portfolio was not well diversified? Sadly, it has happened to many people.  Sometimes people find out too late that reducing portfolio risk is not likely to be accomplished by naively choosing among stocks, or other investments.  Strategy matters.

The goal is to have a steady growth. Real growth. Growth that is greater than the rate of inflation. We believe most investors can and should get a compound return which is three to four times the rate of inflation over periods of five years or longer.¹  And, by applying Markowitz’ science, we believe this type of growth can be achieved with about half the risk of investing in the S&P500 stocks alone.²

We want our clients to sleep well, confident that they are getting a good, reasonable return, without unnecessary volatility, and regardless of which classes, sectors, or industries are currently in favor, or out of favor. For investors with the right strategy, "Spinning Wheel" is just a good song, not cause for alarm.

HOME

¹ Results cannot be guaranteed

² Risk measured by 1-year standard deviation of expected returns; Standard deviation is a measure of the volatility of an investment as defined by the highs and lows of the investment's price.  Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.  Past performance is not indicative nor a guarantee of future results.  The S&P500 is an unmanaged stock index.  S&P500 is a registered trademark of Standard and Poor's Corporation.  Investors cannot invest in the S&P500.  Past performance is not indicative of future results.

Hyperlink Disclaimer:  The information being provided is strictly as a courtesy.  When you link to any of the websites provided herewith you are leaving this site.  Financial Planning Associates, Inc. and Royal Alliance Associates, Inc. make no representation as to the completeness or accuracy of information that is provided at these sites.  Nor are the companies liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third party technologies, sites, information and programs made available through this site. 

When you leave the website of Financial Planning Associates, Inc. you assume total responsibility and risk for your use of the site you are linking to.