wellspoken

From the Desk of SagePoint Financial

By Mike Mayer

Alpha, beta, annualized return, maximum drawdown, time taken to recover from a drawdown, expense, management experience, etc. – these are just a few of the measurements everyone uses to judge a strategy. While all can be insightful, it has been our experience that one of the first steps in judging a strategy is not listed above!

The acid test for any strategy is how it performed over a full market cycle. We have seen great performance from strategies over a 3-5 year period, only to blow up the next couple of years. Why? Because too often the period that is being reviewed is only a bull market cycle and it gives you no insight into how well the strategy will work under pressure.

As an example, it is common to look at 1 or 3 year returns and make judgments. But if you were practicing that type of analysis during 2006 or 2007, you would only be looking at the bull market performance. And that could lead to a major mistake. Many managers/strategies excel in bull markets and are a disaster in bears or vice versa.

For the clearest vision, look at the whole picture: how did a strategy perform over the last market cycle, it probably will give you a solid idea of what to expect during the next market cycle.

All of the Research Model Portfolios that were in existence during the FULL period of time in the chart below, gained over +92% on average during the market cycle of 8/31/1998 through 9/30/2002. That should give one confidence that if the strategy can survive a terrible market cycle, that it should withstand another. And that was the exact outcome, the strategies gained an average +65% during the next market cycle, 9/30/2002 through 2/28/2009. (Click here for chart.)

For investors practicing a buy/hold or fixed allocation it became the ‘lost decade’. However, the average of the Model Portfolios in existence over the two full market cycles gained an impressive +210.5%. We are optimistic for the future. If these strategies can add that much value during some of the hardest market cycles, the returns during a normal cycle could be spectacular.

The only thing we know for certain is the future will hold more market cycles. It is our belief that the best way to prosper, no matter what the markets may bring, is a proven active allocation strategy.

For further information regarding Active Allocation, Contact Art Ortman or Mike Mayer at SagePoint Financial (208) 888-0936.

SagePoint Financial, Inc., is not affiliated with Capital Educators Federal Credit Union. Securities are not insured by NCUA, are not obligations of or guaranteed by Capital Educators Federal Credit Union and are subject to investment risks including possible loss of principal investment.

Securities and investment advisory services offered through SagePoint Financial Inc., A registered Broker Dealer, Registered Investment Advisor and member FINRA/SIPC.

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