Our Investment Strategy

History has shown that, while stocks generally trend upwards, they can experience extended time periods in which there are no lasting gains. As the chart below shows, there have been several periods in the past century in which the market has made no net gains in the US for as long as 25 years.

The US market is not the only one that has experienced long periods of non-performance. Japan’s stock market is still substantially below its peak in 1989 with no full recovery in sight. We contend we are in the midst of another long-term bear market, also known as a “Secular Bear Market.”

Active Management in a Secular Bear Market
During periods of generally rising markets, known as “Secular Bull Markets,” one can buy and hold with a high expectation of making money. Not so during Secular Bear Markets. In order to make money then, one must take a more active approach. A close examination of the chart above shows the stock market experiences huge swings during Secular Bear Markets. If one can capture gains made during those upswings and step aside during downswings, one can still make profits. 

Utilizing technical and cyclical analysis, we attempt to identify the stage we are experiencing in the current investment cycle and evaluate inclusive market risk. This drives our overall asset allocation decisions.

Subsequently, we attempt to identify and invest in the strongest sectors, asset classes and specific investment funds. We utilize a risk-adjusted trend analysis approach to make this identification and use it to determine and fine tune specific asset allocations. 

McDaniel Knutson Methodology
Every Monday morning, our analysts perform in-depth research both on the overall health of the market and on specific investments. Our analysts examine multiple indicators, including new highs and lows, market breadth, greed/fear indicators, price-earnings ratios, interest rates, relative strength, Bollinger bandwidth, and bond prices.

The ultimate goal is to determine the overall market climate. Simply put, we want to know – given the current environment – if we should buy, sell, or hold. More specifically, we attempt to ascertain which markets are showing strength and which are showing weakness.

Once we draw conclusions about the big picture, we zoom in to the specific investments in each portfolio. Every Monday, each holding in every model is analyzed against certain standards to make sure it is performing the way we expect, given the model it is in. If a particular investment is performing up to standard or above, we leave it alone. If it is underperforming – particularly during a market downswing – we look to replace it with one that is more appropriate.

One of the hallmarks of all our investment models is safety-first thinking. We are willing to give up a little performance on the upside if we can garner some protection on the downside. Making money when times are good doesn’t help the client if it is all given back in the bad years.

While we perform this analysis weekly, we don’t necessarily make changes every time. If the current holdings in our models are performing well, we leave them in the model until analyzing them again the following week.

Dynamic Models
We offer three dynamic portfolios, which clients can combine in varying proportions in an account. 

• Dynamic Growth seeks capital appreciation, wherever it may be found, while simultaneously controlling risk. We may invest in any market sector, style or country. We may invest in only one broadly diversified fund or in multiple more-concentrated ones. When we determine conditions are appropriate, we invest very aggressively with the objective of capturing short-term gains. When conditions dictate otherwise, we invest less aggressively and may even short the market with the objective of capturing appreciation from the downturn. This model is appropriate for individuals seeking growth and who are willing to assume market risks to achieve their objective.
• Dynamic Bond seeks income and growth utilizing bond funds. The primary objective is to preserve capital and realize positive returns when available. Bond funds are selected based upon positive trends and include government, inflation-adjusted, high-yield corporate, and foreign bonds. In selected situations, we may take a short-bond position. Our holding period will typically be several weeks. Given the conservative objective, trends are monitored very closely, and tight, stop-loss levels are established to reduce risk. This strategy will never hold equities in any amount and is appropriate for investors wanting relatively low levels of risk.
• Dynamic Muni Bond is managed exactly like Dynamic Bond, but this strategy only invests in municipal bond funds.It is appropriate for investors who are seeking a strategy that will reduce tax implications for a taxable account and are willing to take relatively low levels of risk.

Dynamic Investment Strategies are offered by McDaniel Knutson Financial Partners, a "Securities and Exchange Commisson" registered investment advisor.