Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Financial Crisis Halves Retirement Fund Values

Personal_Finance / Pensions & Retirement Dec 30, 2008 - 10:38 AM GMT

By: Steve_Selengut

Personal_Finance Best Financial Markets Analysis ArticleCrash! The 2007 thru 2008 financial crisis halved 401(k), IRA, and Mutual Fund values in a matter of months. For many, retirement dates had to be pushed back; for others, new jobs had to be found. The tragic flaw? No income allocation in the investment program. Market value builds egos; income pays the bills.

Few employers cautioned Savings Plan participants that 401(k)s are just not defined benefit programs. Few mutual fund distributors suggested to benefit departments that their programs were missing something of critical importance.

Throughout the meltdown, all investment securities fell in market value. But the vast majority of income securities, including closed end income funds (CEFs), have continued to pay interest and dividends. Market value builds over-confidence; income pays the bills.

The Working Capital Model (WCM) is a comprehensive system for investment management that is based on uncompromising rules of engagement. The investor's focus must remain centered on the development of dependable cash flow and the creation of an expanding number of houses and hotels on his game board.

With a reasonable amount of effort, and a lot of self-discipline, anyone can use it to build a portfolio, slowly and sanely, benefiting from the cycles we all expect to continue indefinitely. All cycles have two components; the WCM helps you deal with each.

Every portfolio holding must generate regular income of some kind and each must have profit potential--- at least at the time of purchase. The planned balance between income producers and growth providers (equities) must be maintained throughout the process, even though there may be no immediate need for the income. Have you learned that unrealized gains are not growth?

Year to year, we want to see reasonable growth in both Working Capital (the total cost basis of the cash and securities in the portfolio) and base income (interest and dividend income produced by the securities in the portfolio). But more importantly, we want to produce this growth in a lower-than-usual risk environment, made up of properly diversified investment grade securities.

The first steps in the investment process are Management Functions: Planning, Organizing, Leading, and Controlling

Planning involves the identification/definition of Investment Goals and Objectives. They should be long-term but flexible over time. They should include parameters and rules that are well thought out--- at the personal level. They should be reasonable and realistic historically.

Goals and objectives are essential, but they need to be laid-up on a foundation that reduces the risk of loss at various stages in the life cycle of the investment program. Asset allocation is a planning/organizing tool used to design the portfolio in a way that will balance the need for growth in Working Capital with the age-dependent risk tolerance of the investor.

Asset allocation decisions should implement and support the Investment Plan. Under normal circumstances, the securities in the income "bucket" of the portfolio (bonds, government securities, mortgages, preferred stocks, REITs, etc.) are all much safer than any of those in the equity "bucket".

An asset allocation with 50% in each bucket is much more conservative than one with 80% directed toward equities--- regardless of the quality ratings we require for the equity securities. Asset allocation decisions must be made using the cost basis of the securities in each bucket.

Beyond asset allocation itself, organizing involves selecting actual securities that fit into the two investment buckets in a properly diversified manner. It may involve several separate portfolios, but must be easy to direct and control.
Diversification rules (also based on security cost basis) will guide the portfolio into a variety of issues and sectors.

Proper diversification assures that the overall risk of loss is spread around companies, countries, businesses, and geographical areas. Market capitalization issues, and global representation are dealt with behind the scenes, in the quality determination phase of the security selection process.

Leading, most simply, is personal decision-making. You must direct the activities of others (brokers/managers/accountants/etc.) who may be offering you investment advice. The investment manager (you are the primary investment manager) must create the quality, diversification, and income generation rules (the QDI) that govern the day-to-day operations of all portfolios.

Why would anyone accept a portfolio that was not designed for his or her own unique situation and needs? Laziness, confusion, brainwashing, ignorance of the markets--- all of the above?

The Principles of Investing (the QDI) are superimposed in, on, and around the management functions. They control the security selection process to help reduce portfolio risk. They help set the targets for profit taking and provide mind-set controls that enforce the rules. They assure that every security within the portfolio contributes to base income.

It is imperative that you lead your portfolio into strict guidelines for security quality, cost-based diversification, income generation, and profit taking. Rules for disposing of downgraded or weakening positions must also be codified.

Profit taking is the most satisfying of all portfolio decision-making functions--- and possibly the least popular! Most of the reasons are ego centered, until the WCM shows clearly the opportunities that are available for the newly created working capital.

Reasonable targets must be set (between seven and ten percent dependent on the amount of smart cash available), and triggers pulled insensitively when targets are reached--- no hindsight at all can be tolerated. A monthly brokerage statement with unrealized gains is a sign of poor management.

Controlling involves realistic performance evaluation, and monitoring to assure that you are following your own rules and guidelines. Comparing your annual change in market value with the DJIA or S & P is not performance evaluation.

By Steve Selengut
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Disclaimer : Anything presented here is simply the opinion of Steve Selengut and should not be construed as anything else. One of the fascinating things about investing is that there are so many differing approaches, theories, and strategies. We encourage you to do your homework.

Steve Selengut Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules