Observations

The relationship with a client is very unique. I just “fired” one. Let me tell you why.

The most important forces acting on the broad equity market averages are real short-term interest rates and the trend of short-term interest rates and commodities.

Stocks offer great returns following a decline in short-term rates. This is what happened after 1995 and after 2003. This is the time when investors make substantial profits. And we did (see bottom of page 3).

Rising short-term rates, on the other hand, are deadly for market returns. Examples: 1994 and 2000. And now.

Make no mistake about it. The easy money for this market cycle has been made when short-term rates were declining and were stable. Now is the time to think about “capital preservation” and keep the eyes on the ball so that we do not miss opportunities. This is exactly what I am trying to do for you.

Some investors have a short-term view (a few months) and they expect miracles from a money manager. They switch advisors after a few months based on performance. They think they get rich quicker by doing so. I do not agree with this approach.

Prospective clients, like the client I “fired,” should make every effort to understand the manager’s investment philosophy and background.

The second important step is to become aware of the manager’s performance in down and in up markets. It provides important clues about his/her style. Performance over the long term is misleading because it hides the volatility of the portfolio.

Does it sound logical? I think so. But some investors do not think so. They are too uptight and pragmatic in their beliefs. They do not recognize there are cycles in the equity markets. It is easy to manage the upside. It is more difficult to manage the downside.

In July 1999 some clients left me because I turned too cautious. Then they called me because they lost 65% of their money in just six months. Clients should understand these crucial market dynamics.

(This "Observations" appeared in the 4/24/06 of The Peter Dag Portfolio)

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked best market timer in the 12 and 6 months ending 8/20/10 by Timer Digest

To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.

Disclaimer.The content on this site is provided as general information only and should not be taken as investment advice nor is it a recommendation to buy or sell any financial instrument. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site.