Now Is the Time—Become An Active Investor
History and memory are the head and tail sides of the same coin. History is grand and soft-edged, lasting as long as humans do; memory is focused and sharp, lasting as long as the mind that holds it. For example, history has recorded all of 2008 and the first two months of 2009 as the period in which Americans lost nearly $13 trillion in wealth, more than the combined annual GDP of Germany, Japan, and China. For the individual, memory recorded horrific disbelief as the Dow dropped 2,300 plus points the first week in October. Memory imprinted the ongoing anxiety, the sick feeling of watching retirement principal unalterably slip away. Who will forget the almost absolute compulsion to sell each day the markets hit new lows?
The smoothed edge and sheer breadth of history can dull the sharply focused reality of memory—time heals all wounds. But razor-sharp memory is what we want now because in the vivid memory of recent money loss, a profound lesson awaits—your investment portfolios
need your personal attention to make your money work most effectively.
As your lost wealth slowly returns, will you tend to forget your recent pain? Will you act passively regarding your investments? Will you rely strictly on your financial advisor or broker (advisor/broker) to maximize the return on your investments? Is the time-honored strategy of buy and hold for long-term investing still in play? Should you continue to follow traditional, conservative formulas designed to put our investments on autopilot? Yes, these formulas generally return on average 8-10 percent annually, but what if a more active approach on your part could put the annual return closer to 10 percent than 8 percent? Over time and compounded, this 2 percent differential will mean scores of thousands more dollars in your account. It wouldn’t take much to accomplish this notable improvement in annualized returns—just your commitment to participate in the management of your investment portfolio.
The first step is to become active. Read books on investing, watch financial television, follow credible analysts, and learn the language of investing. This will inspire you to become more active in managing your money, as well as allow you to talk more specifically with your advisor/broker. Before sitting down with your advisor/broker, however, you need a basic understanding of how key financial pieces fit together.
Becoming active will teach you how it all works, generally. You will come to understand a basic, economic truth—economies and markets do not operate in a vacuum. They ebb and flow in relation to one another on a global scale. One grand example is the fiscal/trading relationship of the U.S. and China. China buys our debt because we are by far the largest consumer of Chinese goods. As we go, so goes China, and vice-versa. So, no matter the negative rhetoric, it is in both our best interests to facilitate healthy trade with one another.
A specific market example is the recent market-price behavior of oil relative to the U.S. dollar (correlation trade). This ebb and flow affects the stream of money between these two markets, as well as the flow of money into all of the commodity markets, which tend to follow the pattern of these two “leading” markets. There are three important reasons for this: globally, oil trades in U.S. dollars; the strength or weakness of the U.S. dollar depends of the perceived health of the U.S. economy; the global fear factor affects both. These “intermarket relationships” affect price movement in individual markets, as well as the flow of money into specific, economic sectors.
Effectively managing your portfolio requires understanding the big economic picture, the ebb and flow of markets, the details of your positions, and time—time your advisor/broker might not have for you personally. That’s OK; invest your own time. Visit your advisor/broker regularly. Take with you a fundamental awareness of current market/economic conditions, an understanding of investing principles, clarity about your investment goals, and the ability to speak the language of investing. Your advisor/broker will appreciate your active approach and, more than likely, will give you and your portfolio the deserved attention. Keep in mind, the goal of active participation is not to manage your advisor/broker; rather, it is to discuss investment strategy, to suggest more exposure to this commodity or less exposure to that sector (for example) based on reasoned thinking and the prevailing economic/market conditions. Combining your thinking with that of your advisor/broker improves the probability of moving your annualized return closer to the desired 10%.
In 2010, taking advantage of opportunity created from our global economic recovery requires active participation. For example, did you know that Europe, China, and the emerging economies of Eastern Europe and Asia are recovering faster than the U.S.? It makes sense, then, to ascertain how much of your equity is invested in U.S. based positions relative to how much is invested in foreign markets. It makes even more sense to suggest greater exposure to these markets to increase your rate of return in the near term. As well, the technology sector historically benefits from a strengthening economy, and small-cap stocks generally kick in as the economy solidly recovers. Should you have more exposure to these areas in 2010? Tweaking in this way (and others) will affect your investment return positively.
For far too long most investors simply have trusted those in the financial world with their money. History will record that in 2008 and 2009 the bankers fiddled while our money burned. Even the wisest investor felt searing heat from combusting markets. Most had little chance to escape the flames. But 2010 is a new time, a time of economic recovery, which will present profitable opportunities. Achieving the best return on your equity requires your active participation. Now is the time to let memory go and start a new history with you actively participating in your investment portfolio. Now is the time.
Editor’s Note: Get actively involved with your investment portfolio and join the author’s favorite community web site,
– The Year in Review Part II –
Highs and Lows
Last week we talked about how the central
bank liquidity creation has been the major driving force
in the markets during 2009.
of that money thrown into circulation has given us our
current “sugar high” and will also provide us some
accompanying side effects, most notably wild volatility
week, pictures are worth a thousand words!
Let’s look at a couple of charts that tell the
volatility story really well.
First, here is a compressed daily chart (meant to
show trends rather than detail!).
wanted to show the full volatility cycle so my apologies
for cramming so much data onto the chart.
A massive volatility contraction originated in
2000 and continued over into the first part of 2007.
While you don't see 2005 and 2006 on this chart, you can
see in the next chart that the ATR lines extended
basically low and flat from 2005 into 2007. Then in
mid 2007, volatility picked up considerably as the market
moved towards its top in October of 2007.
fear in the markets in the fall of 2008 sent volatility to
all-time highs, both in absolute terms and in relative
you view ATR as a percentage of price, at its height, the
market was moving more than 8% per day on average!
you can see from the chart, the market stayed in a state
of extreme volatility for about nine months with
volatility not waning until May of 2009.
a funny thing happened: volatility continued to drop.
And it dropped so far that we’ve only had a
handful of days in the whole last decade
that were as low as what we saw at the end of December.
To see that longer term perspective, let’s look
at the same chart using weekly bars instead of daily ones.
Does anyone remember the volatility levels when
the Internet bubble popped in 2000? Relate that to
the higher volatility caused by the recent collapse of the
real estate/credit bubble. Pretty dramatic increase,
wouldn't you say?
other very interesting take away from this chart is the
extent of the price retracement so far.
Yes, 2009 was a year of double digit returns, but we
have gained back barely more than 50% of the drop from
October ’07 through March ’09.
Volatility cycles are pretty well documented
occurrences in the market, so while I’m generally not
much for grand predictions, I will say one thing: as
sure as day follows night, we’ll get a volatility
expansion after this volatility contraction. A market
stretched to the upside on contracting volume will either
lead to a blow-off top or a nasty short to intermediate
hang on to your hats ladies and gentlemen because, either
way, we’re likely to see some pretty wild swings from
D.R. Barton, Jr.: A
passion for the systematic approach to the markets and
lifelong love of teaching and learning have propelled D.R.
Barton, Jr. to the top of the investment and trading
arena. He is a regularly featured guest on both Report
on Business TV, and
WTOP News Radio in Washington, D.C., and has been a guest
on Bloomberg Radio. His
articles have appeared on SmartMoney.com and Financial
Advisor magazine. You may contact D.R. at
"drbarton" at "iitm.com".