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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.
(source: Rydex 01/2011)
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 (Secular Bull Markets) one can buy and hold with a high expectation of making money. Not so during Secular Bear Markets.
A close examination of the chart above shows the stock market experiences huge swings during Secular Bear Markets. These periods require a more active investment approach. If we can capture gains made during those upswings and step aside during downswings, we can still make profits.
We use both technical and cyclical analysis to attempt to identify the current investment cycle and evaluate market risk. This drives our overall asset allocation decisions.
We then utilize a risk-adjusted trend analysis approach to attempt to identify and invest in the strongest sectors, asset classes, and specific investment funds.
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 but not limited to:
- new highs and lows
- market breadth
- greed/fear indicators
- price-earnings ratios
- interest rates
- relative strength
- Bollinger Bandwidth
- 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. During our weekly analysis meeting, 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.
