Our Process

How We Manage Investments

Our objective is to provide our clients with the potential for above average gains while at the same time using a system of tactical asset allocation to reduce downside risk. Typically, one of the main objectives facing someone in or nearing retirement is the desire to maintain an accustomed lifestyle without outliving their money. We believe in using a fluid, dynamic and liquid approach to portfolio management and construction. Changes should be made to portfolios based on market conditions only. If changes are not warranted, changes should not be made just to satisfy a "re-balancing" methodology based solely on the time of the year. On the other hand, investments should be adjusted to take advantage of market conditions favorable to company size, investor risk tolerance and sector performance (what businesses are currently being favored in the market). Reductions in exposure to risk should take place when risk levels rise in the market. Our argument is that active portfolio management should provide an investor with the potential to realize higher returns while at the same time maintaining an adequate risk management program. While we do everything within our power to mitigate risks associated with investing, you should always remember that there are risks when investing in the securities markets.

Investor Profiles

We have two mandates with our approach to investment management: 1 - grow the portfolio and 2 - protect the portfolio. One reason for these mandates relates to our attempt to provide our clients with consistent retirement income in an inconsistent world. If the base from which an income is derived does not increase, the income might not be increased without a significant increase in risk of principal reduction. For this reason we view each of our clients with one of these objectives:

  1. Income with growth as a secondary objective
  2. Growth in value with income as a secondary objective
  3. Long-term growth in value without regard to income as an objective

An investor with the first objective will have no less than 35% of a portfolio in income producing investments. An investor with the second objective will have no less than 15% of a portfolio in income producing investments. Clients with the third objective may have up to 100% of a portfolio invested in equities. It should be noted that a client with the third objective is not restricted, and may take a systematic withdrawal from an account just as though an income stream was being generated.


Just as we manage portfolios based on three macro objectives listed above, we also determine equity exposure by the measurements of three factors affecting our tactical asset allocation:

  • Investor Behavior and Sentiment
  • Monetary Indicators and Conditions
  • Relative Valuations

  • Investor Behavior and Sentiment

    It has been said that intelligent investors will "beware of the herd at extremes". There is a problem in this bit of wisdom of determining when the market is at an extreme level and exactly who is "the herd". We have developed ways of categorizing investors as either "smart" or "dumb". Surveys are taken weekly to determine if these two groups expect the market to go up or down. These surveys provide us with excellent anecdotal information, but primary in our determination of investor behavior is, in fact, investor behavior. We are more interested in what these investors are doing with their money than in what they say they are doing with their money.

    There's another old saying that we can use in describing this factor. It's "follow the money". We maintain a daily record of cash flows into the Rydex bull funds and the Rydex bear funds. If investors really expect the markets to increase, they will put an increasing amount of money into the Rydex bull funds. Its contrary if they anticipate a market decline. However, just because these investors are bullish does not necessarily follow that prices will rise. A careful analysis of investor cash flow behavior reveals certain levels at which resistance is met, and investor behavior changes.

    In addition to the flow of money into and out of the Rydex funds and Profunds, we also closely watch activity in option put and call operations. In this way, we are seeing how investors are serious about putting their money at risk, not just talking about it. At certain levels we know that markets have tended to reverse direction as investor attitudes and expectations have changed. By observing this behavior, we can make adjustments to equity exposure in hopes of taking advantage of changes in investor behavior. We use a multitude of other patterns and measurements of investor behavior that are essential to a complete understanding and analysis of the weight of this factor in our asset allocation model.

  • Monetary Indicators and Conditions

    "It takes money to make money". Marty Zweig, thought by many to be one of the most successful market-timers, used extensive interest rate formulas in his market timing model. We know that increases in interest rates by the Federal Reserve Board have contributed to past recessions. This historical knowledge helps us identify when intermediate to longer term turning points might be under way.

    Money provides the fuel to keep the economy and financial markets going. However, an abundance of money does not always flow into stocks. There are other alternatives. The direction of money flow is determined by valuations, not money availability. Valuations will be our next factor. Here we are simply concerned with the availability of money as a supporter, or an albatross, for the equity markets. If the money supply is restricted, equity prices tend to decline. When money supply is "just right", equity prices tend to advance.

    Supporting data is available weekly from the Federal Reserve Board, and bond market expectations are available daily as investors bid interest rates higher or lower. Both money supply and the yield curve are significant contributors to this factor in our tactical asset weighing.

  • Relative Valuations

    We believe that money will eventually go to where it believes it will be treated best. Of course, there is "dumb money" and then there is "smart money". If equities or stocks are extremely overvalued, as they were in 1999, smart money will stop flowing into them. The same is inversely true for extreme undervaluations. When stock valuations had gone to extreme undervaluations in late 2008, early 2009, value investors started buying stocks and stopped the horrific decline.

    There are many ways of determining valuations. We believe the best is the IBES Valuation Model, reported by economist Ed Yardeni to be the measurement used by the Federal Reserve Board. The Model does not tell us the direction of markets tomorrow, but it does tell us the extent to which we may expect prices to advance or decline prior to a reversal in direction. Certainly, when prices are extended relative to alternatives, it makes sense to become more cautious, or to become more aggressive, depending in the direction of the extension.

  • Summary

    Financial markets are fluid. However, investors are emotional and dangers await the unsuspecting and unprepared investor. There is always the danger that an investor will come too late to the party, or leave too late. To be a successful investor, you need a system that works, and you need to stay with that system as emotions challenge your position.

    There is no perfect system, but we believe we have a system that has proven itself over a long period of time to be reliable. It consists of only three factors: investor behavior and sentiment, monetary indicators and conditions and relative valuations. When these three factors are put together, a model can be created that will equip the investor with a reliable measurement of equity exposure. Our objectives are to help the investor avoid a serious decline in portfolio value, while including the investor in market advances. Our system cannot guarantee that an investor will not and cannot lose money, nor is our system market timing. It is essentially a measurement of risk that includes a component telling us to what extent we can reasonably be exposed to that risk. Our goal is to take advantage of market extremes and, hopefully, enhance your investment returns. To accomplish this, we make market decisions based on market measurements rather than emotions caused by market actions.