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Our Investment Strategy

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History has shown that stocks generally trend upwards though they can experience extended periods in which there are no lasting gains. As shown in the chart below, there have been several instances in the past century in which the U.S. market has made no net gains for as long as 25 years.

Logarithmic graph of the Dow Jones Industrial Average from 12/1896 through 12/2010.

Source: Graph created by Rydex|SGI using data from www.dowjones.com 01/2011.

Performance displayed represents past performance, which is no guarantee of future results. The Dow Jones Industrial Average is unmanaged and unavailable for direct investment. Returns do not reflect any dividends, management fees, transaction costs or expenses. Contact your financial advisor to discuss this concept further. For more information call 800.820.0888 or your financial advisor.

(source: Rydex 01/2011)

The U.S. market is not the only one that has experienced long periods of non-performance. For example, Japan’s stock market is still substantially below its peak in 1989 with no full recovery in sight. We contend we are in the midst of another long-term bear market, also known as a Secular Bear Market.

Active Management in a Secular Bear Market

During periods of generally rising markets, also known as Secular Bull Markets, one can buy and hold with a high expectation of making money. This is not the case during Secular Bear Markets.

A close examination of the chart above shows that the stock market experiences huge swings during Secular Bear Markets. These periods require a more active investment approach. If we can capture gains made during those upswings and step aside during downswings, then we can still make profits.

We use both technical and cyclical analysis to attempt to identify the current investment cycle and evaluate market risk. This process drives our overall asset allocation decisions. We then utilize a risk-adjusted trend analysis approach to attempt to identify and invest in the strongest sectors, asset classes, and specific investment funds.

McDaniel Knutson Methodology
Every Monday morning, our analysts perform in-depth research on the overall health of the market and on specific investments. Our analysts examine multiple indicators including, but not limited to:

  • new highs and lows
  • market breadth
  • greed/fear indicators
  • price-earnings ratios
  • interest rates
  • relative strength
  • Bollinger Bandwidth
  • bond prices

The ultimate goal is to determine the overall market climate. Simply put, we want to know – given the current environment – if we should buy, sell, or hold. Specifically, we attempt to ascertain which markets are showing strength and which are showing weakness.

Once we draw conclusions about the big picture, we zoom in to the exact investments in each client portfolio. During our weekly analysis meeting, we examine each holding in every model against certain standards to make sure it is performing the way we expect. If a particular investment is performing up to standard or above, then we leave it alone. If it is underperforming – particularly during a market downswing – we look for a replacement that is more appropriate.

One of the hallmarks of all our investment models is a “Safety First” mentality. This means that we are willing to give up a little performance on the upside if we can garner some protection on the downside. Making money when times are good does not help if you then lose it all when times are bad.

We do not necessarily make changes every time we perform an analysis – if the current holdings in our models are performing well, then we leave them in the model and analyze them again the following week.

Past performance is not an indication or guarantee of future results. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. A diversified portfolio does not assure a profit or protect against loss in a declining market.