AT ALHAMBRA INVESTMENT PARTNERS WE OFFER DIFFERENT PORTFOLIO APPROACHES BASED ON YOUR PERSONAL INVESTMENT PHILOSOPHY, GOALS, AND RISK TOLERANCE. OUR INVESTMENT STRATEGIES CAN BE DIVIDED INTO TWO CATEGORIES: STRATEGIC AND TACTICAL. WHILE MOST INVESTORS ADHERE TO ONE CATEGORY, THE FOUNDERS OF THE COMPANY RECOGONIZE THE BENEFITS OF BOTH APPROACHES.

AT OUR FIRM BOTH APPROACHES SHARE MANY COMMON PHILSOPHIES. ALMOST ALL OF OUR PORTFOLIOS TAKE A MULTIPLE ASSET CLASS APPROACH SIMILAR TO TECHNIQUES EMPLOYED BY MAJOR ENDOWMENT FUNDS LIKE YALE & HARVARD; AND STATE PENSION FUNDS LIKE CALIFORNIA & NEW YORK. THIS MULTIPLE ASSET CLASS APPROACH IS BASED ON MODERN PORTFOLIO THEORY AND RESULTS ARE PRIMARILY DRIVEN BY ASSET ALLOCATION DECISIONS.

BOTH APPROACHES INCLUDE PORTFOLIOS THAT ENCOMPASS A NUMBER OF ASSET CLASSES INCLUDING EQUITIES, FIXED INCOME, REAL ESTATE, AND COMMODITIES. ALSO BOTH APPROACHES DESIGN PORTFOLIOS THAT ARE CONSTRUCTED MAINLY OF INDEX FUNDS AND/OR INDEX ETF’S THAT ARE VERY LOW COST AND TAX EFFICIENT.

ESSENTIALLY, THE MAIN DIFFERENCE BETWEEN THE STRATEGIC AND TACTICAL APPROACH IS HOW THE PORTFOLIOS ASSET ALLOCATIONS ARE CHANGED OR REBALANCED. THE TACTICAL APPROACH DESIGNS PORTFOLIOS THAT ARE REBALANCED USING A DYNAMIC APPROACH BASED ON A VARIETY OF FACTORS INCLUDING: TOP DOWN GLOBAL ECONOMIC OUTLOOK, SECTOR SPECIFIC FACTORS, FUNDAMENTAL ANALYSIS, AND TECHNICAL ANALYSIS. BY CONTRAST, THE STRATEGIC APPROACH DOES NOT ADJUST YOUR PORTFOLIO BASED ON ECONOMIC OUTLOOK OR MARKET TRENDS BUT RATHER USES A STATIC ASSET ALLOCATION MODEL THAT IS REBALANCED PERIODICALLY TO KEEP THE PORTFOLIO IN LINE WITH YOUR DESIRED RISK REWARD PROFILE.

MY ROLE AT ALHAMBRA INVESTMENT PARTNERS IS TO BE HEAD OF STRATEGIC INVESTING. THIS IS THE APPROACH I TAKE FOR MY PERSONAL INVESTMENTS AND THE APPROACH I RECOMMEND TO MY CLIENTS. THE REMAINDER OF THIS DOCUMENT WILL FOCUS ON THE RATIONALE AND BENEFITS OF TAKING THE STRATEGIC APPROACH TO INVESTING.

THE STRATEGIC APPROACH TO PORTFOLIO MANAGEMENT IS BASED ON SEVERAL PREMISES THAT EMANATE FROM YEARS OF ACADEMIC RESEARCH. THE KEY ASSUMPTIONS ARE:

1) EFFICIENT MARKETS THEORY – FEW CAN BEAT THE MARKET LONG TERM AND IT IS A WASTE OF TIME AND MONEY TO TRY TO FIGURE OUT MARKET TOPS AND BOTTOMS. ACADEMIC STUDIES STRETCHING BACK TO THE 1900’S HAVE CONSISTENTLY DEMONSTRATED THIS.

2) ASSET ALLOCATION – THIS IS THE SIMPLE ACT OF DESIGNING AN INVESTMENT PORTFOLIO WITH DIFFERENT ASSET CLASSES BASED ON AN INVESTORS FINANCIAL GOALS AND RISK TOLERANCES. IT IS THE MOST IMPORTANT INVESTMENT DECISION ANY INVESTOR MAKES BECAUSE IT IS THE COMPOSITION OF THE PORTFOLIO THAT WILL ULTIMATELY DETERMINE THE RISK AND THE FUTURE RETURN OF YOUR PORTFOLIO.  MANY ACADEMIC STUDIES HAVE SHOWN THIS TO BE TRUE.

3) MODERN PORTFOLIO THEORY – ESSENTIALLY MODERN PORTFOLIO THEORY, PIONEERED BY HARRY MARKOWITZ, DEMONSTRATES THAT A PORTFOLIO WITH A MIX OF ASSET CLASSES LIKE DOMESTIC STOCKS, INTERNATIONAL STOCKS, BONDS, REAL ESTATE, AND COMMODITIES, CAN PROVIDE LESS OVERALL PORTFOLIO RISK AND HIGHER RETURNS. MARKOWITZ WON THE NOBEL PRIZE FOR HIS WORK AND MANY OTHER ACADEMICS HAVE CONFIRMED HIS WORK. THE ADDITION OF DISSIMILAR ASSET CLASSES WITH LOW OR NEGATIVE CORRELATION TO YOUR PORTFOLIO IS THE KEY. PUT SIMPLY, WHEN SOME ASSET CLASSES ARE ZIGGING OTHERS MAY BE ZAGGING. FOR EXAMPLE IN 2008 TO EARLY 2009 WHEN STOCKS WERE GOING DOWN, BONDS WERE GOING UP.

4) TIME HORIZON – THE STRATEGIC APPROACH IS MEANT FOR INVESTORS WITH A LONG TERM INVESTING TIME HORIZON OF AT LEAST 10 YEARS FOR ANY PORTFOLIO CONTAINING STOCKS, REAL ESTATE, AND COMMODITIES. PORTFOLIOS WITH SHORTER TIME HORIZONS SHOULD GENERALLY BE INVESTED IN HIGH QUALITY SHORT OR INTERMEDIATE TERM BONDS.

5) BUY, HOLD, AND REBALANCE – THE STRATEGIC OR PASSIVE APPROACH IS NOT A ONE DECISION BUY, HOLD, AND FORGET PORTFOLIO. REBALANCING THE PORTFOLIO TO MAINTAIN THE INTENDED MIX OF ASSETS THAT REFLECTS YOUR GOALS AND RISK TOLERANCE IS VERY IMPORTANT AND SHOULD BE DONE PERIODICALLY. HOW OFTEN A PORTFOLIO IS REBALANCED CAN BE INFLUENCED BY MARKET FACTORS, TAX CONSIDERATIONS AND CASH FLOW NEEDS.

REBALANCING CAN:

A)  INCREASE THE LONG TERM RETURN OF A PORTFOLIO.

B)  MAINTAIN THE DESIRED RISK PROFILE OF THE PORTFOLIO

C)  IMPOSE DISCIPLINE ON INVESTORS. REBALANCING FORCES AN INVESTOR TO BUY ASSETS THAT HAVE GONE DOWN IN VALUE AND SELL ASSETS THAT HAVE GAINED. IN OTHER WORDS REBALANCING FORCES AN INVESTOR TO BUY LOW AND SELL HIGH.

6) INDEX FUNDS – OUR STRATEGIC PORTFOLIOS CONSIST OF INDEX FUNDS AND/OR EXCHANGE TRADED FUNDS (ETF’S) ON INDEXES. HISTORY HAS CONSISTENTLY SHOWN THAT PASSIVELY MANAGED INVESTMENT VEHICLES THAT TRACK MARKET AVERAGES OUTPERFORM THE MAJORITY OF ACTIVELY MANAGED FUNDS. IN ADDITION, INDEX FUNDS HAVE MUCH LOWER COSTS ON AVERAGE THAN ACTIVELY MANAGED FUNDS. THEIR MANAGEMENT FEES ARE SIGNIFICANTLY LESS. PORTFOLIO TURNOVER IS LOWER RESULTING IN REDUCED TRADING COSTS AND GREATER TAX EFFICIENCY.

SOME STUDIES OLD AND NEW THAT SUPPORT THE STRATEGIC APPROACH:

1) LOUIS BACHELIER – IN 1900 THIS YOUNG FRENCH MATHEMATICIAN DID A STUDY WHERE HE CONCLUDED THAT “ IT IS DIFFICULT TO BEAT THE MARKET BECAUSE EXISTING SHARE PRICES ALREADY INCORPORATE AND REFLECT ALL RELEVANT INFORMATION”

2) ALFRED COWLES – IN 1933 THIS YALE GRADUATE LED A STUDY THAT REVIEWED OVER 2500 MARKET FORECASTS FROM LEADING INVESTMENT FIRMS VERSUS ACTUAL MARKET RESULTS AND CONCLUDED “ THEY COULDN’T FORECAST”. HE EXPANDED THE STUDY TO FORECASTS OF 6,904 MARKET PROFESSIONALS FROM 1929 TO 1943 AND FOUND THE SAME DISMAL RESULTS.

3) EUGENE FAMA – IN THE 1960’S THIS UNIVERSITY OF CHICAGO PROFESSOR PERFORMED A DETAILED ANALYSIS OF STOCK PRICE DATA AND CONCLUDED “THAT STOCK PRICES ARE VERY EFFICIENT AND THAT IT IS EXTREMELY DIFFICULT TO PICK WINNING STOCKS, ESPECIALLY AFTER FACTORING IN THE COSTS OF FEES”.

4) BURTON MAKIEL – A PRINCETON PROFESSOR WHO WROTE A CLASSIC INVESTMENT BOOK CALLED “A RANDOM WALK DOWN WALL STREET” THIS BOOK, ORIGINALLY PUBLISHED IN 1973, HAS BEEN REVISED 9 TIMES INCLUDING A RECENT 2011 EDITION. HE WROTE THAT “THROUGH THE PAST 30 YEARS MORE THAN TWO THIRDS OF PROFESSIONAL PORTFOLIO MANAGERS HAVE BEEN OUTPERFORMED BY THE UNMANAGED S&P 500 INDEX”.

5) HARRY MARKOWITZ – THE FATHER OF MODERN PORTFOLIO THEORY. HE UNDERSTOOD HOW RISK AND RETURN RELATED. HIS CONCLUSION WAS THAT TO BUILD EFFICIENT PORTFOLIOS THAT OFFER HIGH RETURNS WITH THE LEAST AMOUNT OF RISK WE NEED TO HAVE A MIXTURE OF UNCORRELATED SECURITIES IN OUR PORTFOLIOS. IN 1992 HE WON THE NOBEL PRIZE IN ECONOMICS. HIS FINDINGS WERE CONFIRMED MANY OTHER ACADEMICS.

6) GARY BENSON, L. RANDOLPH HOOD, & GILBERT BEEBOWER – THEY DID THE MOST FAMOUS STUDY ON ASSET ALLOCATION. THIS STUDY LOOKED AT THE PERFORMANCE OF 91 LARGE PENSION FUNDS. THEY REASONED THAT ASSET ALLOCATION DETERMINED 94% OF THE VARIANCE OF THEIR INVESTMENT RETURNS. ANOTHER STUDY BY ROGER IBBOTSON AND PAUL KAPLAN, PUBLISHED IN 2001, CONFIRMED THEIR RESULTS. THESE STUDIES SHOW THAT IT IS NOT THE SELECTION OF INDIVIDUAL STOCKS OR BONDS BUT RATHER THE MIX OF ASSET CLASSES IN YOUR PORTFOLIO THAT DRIVES INVESTMENT PERFORMANCE.

7) VANGUARD GROUP – THEY DID A STUDY USING A 40 YEAR DATABASE OF 420 BALANCED MUTUAL FUNDS. IT CONCLUDED THAT 77% OF THE VARIABILITY OF A FUNDS RETURN IS DETERMINED BY THE STRATEGIC ASSET ALLOCATION POLICY. MARKET TIMING AND STOCK SELECTION PLAYED MINOR ROLES. THE STUDY ALSO CONCLUDED THAT THE BENCHMARK INDEXES HAD A HIGHER RETURN, AND FINALLY THAT LOWER COST FUNDS OUT PERFORMED HIGHER COST FUNDS.

8) S&P STUDIES – AN S&P STUDY LOOKING AT THE 5 YEARS ENDING IN MID 2008 SHOWED THAT THE S&P 500 INDEX BEAT ABOUT 70% OF THE MANAGED LARGE CAP MUTUAL FUNDS. THE MID CAP INDEX, SMALL CAP INDEX, AND GLOBAL INDEX ALSO OUTPERFORMED THE MAJORITY OF THEIR MANAGED COUNTERPARTS. IT ALSO POINTS OUR THAT IF YOU GO BACK TO 2004 MANY OF THE WORST PERFORMING FUNDS ARE NO LONGER AROUND. BY FOCUSING ONLY ON THE FUNDS THAT SURVIVED, THE RESULTS ARE SKEWED MORE POSITIVELY. ANOTHER S&P STUDY SHOWED THAT FOR THE 5 YEAR PERIOD ENDING IN 2006, MANAGED FUNDS UNDERPERFORMED THEIR RELEVANT INDEX IN ALL NINE STYLE BOX CATEGORIES

9) RUSSELL WERMERS – UNIVERSITY OF MARYLAND PROFESSOR. HE LOOKED AT 452 DOMESTIC EQUITY FUNDS IN THE MORNINGSTAR DATA BASE THAT EXISTED FOR 20 YEARS THROUGH JANUARY 2009. MORNINGSTAR REPORTS THAT 13 OF THESE FUNDS BEAT THE S&P 500 INDEX BY AT LEAST 4% A YEAR. THAT IS LESS THAN 3 OUT OF A 100. EVEN THAT STATISTIC IS TOO ROSY, BECAUSE THAT DOESN’T INCLUDE THE MANY FUNDS THAT WENT OUT OF BUSINESS, AND ALSO BECAUSE IT IS ONE THING TO LEARN AFTER THE FACT THAT A FUND HAS DONE WELL, BUT QUITE ANOTHER TO IDENTIFY IT IN ADVANCE. INDEED HIS RESEARCH FOUND ONLY A MINORITY OF MANAGED FUNDS THAT BEAT THE MARKET IN A GIVEN YEAR CAN OUTPERFORM IT THE NEXT YEAR AS WELL

10) TIME MAGAZINE – A RECENT ARTICLE DATED FEBRUARY 24, 2012  IN TIME’S MONEYLAND COLUMN BY DAN KADLEC, REVIEWED INDEX FUNDS RECENT PERFORMANCE. THIS ARTICLE’S HEADLINE WAS “ INDEX FUNDS WIN AGAIN – THIS TIME BY A LANDSLIDE”  THE ARTICLE POINTS OUT THAT IN 2011 THAT 79% OF LARGE CAP FUND MANAGERS TRAILED THE RETURN OF THE S&P 500 INDEX  ACCORDING TO MORNINGSTAR,  THE LEADING PROVIDER OF FUND PERFORMANCE STATISTICS. HE SAID “ THIS IS A STUNNING DISPLAY OF FUTILITY – AND SADLY THESE RESULTS AREN’T THAT UNUSUAL” ACCORDING TO THE LATEST S&P INDEX VERSUS ACTIVE (SPIVA) SCORECARD: “OVER THE PAST THREE YEARS, WHICH CAN BE CHARACTERIZED BY VOLATILE MARKET CONDITIONS, 64% OF ACTIVELY MANAGED LARGE CAP FUNDS WERE OUTPERFORMED BY THE S&P 500 INDEX; 75% OF MID CAP FUNDS WERE OUTPERFORMED BY THE S&P MIDCAP 400; AND 63% OF THE SMALL CAP FUNDS WERE OUTPERFORMED BY THE S&P SMALLCAP 600,”  IT’S MORE OF THE SAME WITH FOREIGN STOCK FUNDS: 65% OF INTERNATIONAL FUNDS AND 81% OF EMERGING MARKETS FUNDS TRAILED THEIR BENCHMARKS.

IF STUDIES CONSISTENTLY SHOW HOW DIFFICULT IT IS TO BEAT THE MARKET, WHY NOT TAKE THE HIGH PERCENTAGE BET AND CAPTURE THE AVERAGE RETURN OF THE MARKET WITH LOW COST INDEX FUNDS AND/OR INDEX ETF’S.

HISTORICAL STATISTICS SHOW THE RESULTS OF TAKING A 10 YEAR VIEW AND CAPTURING THE MARKET AVERAGES. GOING ALL THE WAY BACK TO 1926 THERE HAS BEEN 77 CONSECUTIVE TEN YEAR PERIODS (ROLLING DECADES). THE AVERAGE ANNUALIZED RETURN FOR THE S&P 500 INDEX OVER THOSE 77 PERIODS WAS ABOUT 10.8%. THERE WERE ONLY FOUR 10 YEAR PERIODS OUT OF 77  WHICH RESULTED IN A LOSS: 1/1 1929 TO 12/31/1938 (-.9% AVG. ANNUALIZED RETURN), 1930 TO 1939 (-.1%), 1999 TO 2008 (-1.4%), AND 2000 TO 2009 (.9%). PORTFOLIO DIVERSIFICATION DOESN’T JUST MEAN OWNING A LOT OF DIFFERENT STOCKS, BUT ALSO DIVERSIFICATION IN TYPES OF ASSET CLASSES IN YOUR PORTFOLIO.

THE IMPORTANCE OF PORTFOLIO DIVERSIFICATION ACROSS ASSET CLASSES UTILIZING MODERN PORTFOLIO THEORY (MPT) CAN BE SHOWN BY LOOKING AT THE 10 YEAR PERIOD FROM JANUARY 1, 2000 TO DECEMBER 31, 2009. THIS TIME PERIOD INCLUDED TWO MAJOR BEAR MARKETS, THE TECHNOLOGY BUBBLE OF 2000 TO 2002 & THE REAL ESTATE BUBBLE OF LATE 2007 TO EARLY 2009. THIS TEN YEAR PERIOD IS SOMETIMES REFERRED TO AS THE LOST DECADE.

IN FACT IF YOU HAD BEEN IN A 100% US BOND PORTFOLIO DURING THE LOST DECADE YOU WOULDN’T HAVE FELT SO LOST. THE 10 YEAR AVERAGE ANNUALIZED RETURN FOR A PORTFOLIO ENTIRELY OF US BONDS (USING THE BARCLAY’S CAPITAL AGGREGATE BOND INDEX) WAS 6.3% BETWEEN 2000 TO 2009.

THE POINT IS NOT TO USE THE BENEFIT OF HINDSIGHT TO CHOOSE AN ALL BOND PORTFOLIO BECAUSE NO CAN PREDICT THE FUTURE, BUT RATHER TO DEMONSTRATE THAT DIFFERENT ASSET CLASSES CAN HAVE COMPLETELY DIFFERENT PERFORMANCES RESULTS DURING THE SAME TIME PERIOD. FOR EXAMPLE SUPPOSE WE HAD CHOSEN EVEN A MARGINALLY DIVERSIFIED PORTFOLIO USING A BLEND OF 60% LARGE CAP US STOCKS (S&P 500 INDEX) AND 40% BONDS (BARCLAY’S CAPITAL AGGREGATE BOND INDEX) REBALANCED ANNUALLY. DURING THE LOST DECADE FROM 2000 TO 2009,THE 60/40 PORTFOLIO HAD AN ANNUALIZED RETURN OF 2.6%.

ALHAMBRA INVESTMENT PARTNERS HAS TWO STRATEGIC ASSET ALLOCATIONS. ONE IS OUR GLOBAL ADVANCED ASSET ALLOCATION PLAN WITH 11 ASSET CLASSES AND THE OTHER IS OUR GLOBAL FUNDAMENTAL ASSET ALLOCATION WITH 7 ASSET CLASSES. OUR ADVANCED ALLOCATION PORTFOLIO IS AN EXAMPLE OF A BROADLY DIVERSIFIED MULTI-ASSET PORTFOLIO THAT TAKES ADVANTAGE OF MODERN PORTFOLIO THEORY TO BOTH INCREASE RETURN AND REDUCE RISK. THE II ASSET CLASSES USED IN THIS PORTFOLIO ARE INDEX ETF’S AND FUNDS ON: TOTAL US STOCK MARKET, US SMALL CAP VALUE STOCKS, TOTAL INTERNATIONAL STOCK MARKET, EMERGING MARKET STOCKS, US REAL ESTATE, GLOBAL REAL ESTATE, COMMODITIES, US SHORT TERM INVESTMENT GRADE BONDS, HIGH YIELD BONDS, GLOBAL SHORT TERM BONDS, AND EMERGING MARKETS BONDS. OUR MODERATELY AGGRESSIVE PORTFOLIO USES AN 80/ 20 MIX WITH THE FOUR BOND ASSET CLASSES BEING 20% AND THE OTHER SEVEN ASSET CLASSES BEING 80%

THIS 80/20 VERSION OF OUR GLOBAL ADVANCED STRATEGIC PORTFOLIO IS FOR INVESTORS WHO HAVE A MODERATELY AGGRESSIVE RISK TOLERANCE. IT PERFORMED VERY WELL DURING THE LOST DECADE. FROM JANUARY 1 2000 TO DECEMBER 31, 2009 THIS PORTFOLIO REBALANCED ANNUALLY HAD AN ANNUALIZED RETURN OF 6.89%(GROSS OF FEES). THIS PERFORMANCE        COMPARES VERY FAVORABLY TO THE S&P 500 INDEX, WHICH HAD A LOSS WITH AN ANNUALIZED RETURN OF -.9% DURING THIS SAME TIME PERIOD. IT ALSO HAD LESS RISK AS MEASURED BY COMPARING STANDARD DEVIATIONS AND SHARPE RATIOS.

I WANT TO EMPHASIZE THAT THIS PORTFOLIO MIX IS NOT FOR EVERYONE. EVERY INVESTOR’S PORTFOLIO MUST BE ADJUSTED TO FIT THEIR UNIQUE CIRCUMSTANCES AND RISK TOLERANCE. AND, OF COURSE AS ALWAYS NO ONE CAN PREDICT THE FUTURE AND PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE.

WE HAVE SEVERAL VERSIONS OF BOTH OUR GLOBAL FUNDAMENTAL AND GLOBAL ADVANCED ASSET ALLOCATIONS. OUR MOST AGGRESSIVE ALLOCATION IS THE 90/10 MIX OF OUR GLOBAL ADVANCED STRATEGIC PORTFOLIO AND OUR MOST CONSERVATIVE IS THE 30/70 MIX OF OUR GLOBAL FUNDAMENTAL STRATEGIC PORTFOLIO. IN THE MOST CONSERVATIVE PORTFOLIO THE 70% IS A SHORT TERM US INVESTMENT GRADE BOND ETF.

OUR STRATEGIC PORTFOLIOS INCLUDE GLOBAL ASSET CLASSES. WE BELIEVE GLOBAL EXPOSURE IS A NECESSARY COMPONENT OF A LONG TERM STRATEGIC PORTFOLIO AS THE WORLD CONTINUES TO BE INCREASINGLY INTEGRATED. THE US REPRESENTS ABOUT 40% OF THE GLOBAL ECONOMY. HOWEVER, THE GROWTH OF OTHER COUNTRIES ON THE WORLD STAGE IS APPARENT. CHINA, FOR EXAMPLE, JUST RECENTLY TOOK OVER THE NUMBER TWO SPOT DISPLACING JAPAN AS THE SECOND LARGEST ECONOMY. THE BRIC COUNTRIES, NAMELY BRAZIL, RUSSIA, INDIA, AND CHINA HAVE ENORMOUS GROWTH POTENTIAL.

EARLIER I HIGHLIGHTED JUST A FEW OF THE MANY ACADEMIC STUDIES THAT DEMONSTRATE HOW DIFFICULT IT IS FOR YOU OR WALL STREET PROFESSIONALS TO CONSISTENTLY PICK  ACTIVELY MANAGED FUNDS THAT OUTPERFORM PASSIVELY MANAGED INDEX FUNDS.  WE ALSO COVERED HOW MODERN PORTFOLIO THEORY SHOWS THE WISDOM OF ESTABLISHING A GLOBALLY DIVERSIFIED PORTFOLIO ACROSS MULTIPLE ASSET CLASSES. HOW REBALANCING THAT PORTFOLIO ENABLES YOU TO RETAIN YOUR DESIRED RISK /REWARD PROFILE AND GIVES YOU THE DISCIPLINE TO HELP YOU BUY LOW AND SELL HIGH.

ANOTHER IMPORTANT BENEFIT OF TAKING THE STRATEGIC APPROACH IS THAT IT HELPS YOU AVOID THE DANGERS OF TRYING TO TIME MARKETS BY PICKING TOPS AND BOTTOMS. THE DANGERS INCLUDE HIGH TRANSACTION COSTS. EVERY TIME YOU DO A TRADE YOU PAY A COMMISSION. GOING IN AND OUT OF STOCKS AND MUTUAL FUNDS IS VERY COSTLY AND TAX INEFFICIENT. THE SAME GOES FOR ACTIVELY MANAGED MUTUAL FUNDS WHO HAVE HIGH TURNOVER. THEIR HIGH COSTS OF TRYING TO TIME MARKETS ARE PASSED ON TO YOU IN THE FORM OF HIGHER EXPENSE RATIOS AND TAX COSTS.

TRYING TO BE A MARKET TIMER CAN MAKE YOU A SLAVE TO MARKET NEWS. THE VERY FEW INVESTORS WHO SUCCEED IN TIMING MARKETS DEVOTE THEIR LIVES TO TRADING. SO UNLESS YOU HAVE TWELVE OR MORE HOURS TO SPARE EVERY DAY YOU ARE BETTER OFF WITH A PASSIVE STRATEGY.

BEING A SUCCESSFUL MARKET TIMER REQUIRES YOU TO MAKE TWO VERY DIFFICULT DECISIONS: WHEN TO GET IN, AND WHEN TO GET OUT. IF YOUR TIMING IS NOT PERFECT, YOU FACE THE DANGER OF MISSING A HANDFUL OF THE MARKETS BEST DAYS. WHAT MAKES IT VERY DIFFICULT IS THAT THE BEST DAYS IN THE MARKET OFTEN COME RIGHT AFTER BIG BEAR MARKETS WHEN INVESTORS ARE STILL LICKING THEIR WOUNDS AND ARE VERY HESITANT TO REENTER THE MARKET.

NASSIM NICHOLAS TALEB IN HIS BOOK THE “THE BLACK SWAN” STATES THAT WHILE THE S&P 500 INDEX, WITH DIVIDENDS REINVESTED, HAD AN ANNUALIZED RETURN OF ABOUT 9.5% OVER THE PAST 30 YEARS, IF YOU MISSED THE 50 DAYS WITH THE HIGHEST RETURN, YOUR TOTAL RETURN IS LESS THAN 1% FOR THOSE 30 YEARS. ASSUMING 252 TRADING DAYS A YEAR, THERE WERE 7,560 TRADING DAYS OVER THE 30 YEARS. THIS MEANS THAT MISSING 50 OF THOSE 7560 DAYS WOULD COST YOU ABOUT 8.5% A YEAR. IT SEEMS TO ME THAT TRYING TO TIME MARKETS IS A VERY BAD BET.

BOTTOM LINE, MY VIEW IS THAT YOU SHOULD TURN OFF THE NOISE OF CNBC’S TALKING HEADS AND WALL STREET’S ARMY OF COMMISSION DRIVEN SALES FORCES AND LET ALHAMBRA INVESTMENT PARTNERS BUILD YOU A GLOBALLY DIVERSIFIED PORTFOLIO OF LOW COST 100% NO LOAD INDEX FUNDS AND ETF’S THAT MATCHES YOUR GOALS AND RISK TOLERANCE. YOUR STRATEGIC ASSET ALLOCATION PLAN SHOULD BE REVIEWED PERIODICALLY AND ADJUSTED AS NEEDED. STRATEGIC INVESTING IS A PASSIVE MANAGEMENT STYLE THAT TAKES A BUY, HOLD, AND REBALANCE APPROACH TO MEET YOUR LONGER TERM INVESTMENT GOALS OF TEN YEARS OR MORE.

PAT MANNING