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Financial News:

The past several years have been very difficult and proper planning and investing is even more critical now. I am now associated with the Garrett Planning Network, providing fee-only financial planning and advice to people of all income levels. Over the past three months, I have been able to review financial plans and portfolios of people currently with "famous" local financial planners. I was appalled by what I saw. If you have friends, relatives or co-workers who could (or should) benefit from my "second opinion" review, please have them give me a call. It is possible I could save them money in the long run.

Why would you want to consider market timing for a portion of your portfolio? The vast majority of financial professionals preach an investment strategy of “buy-and-hold”, and a large percentage use “Modern Portfolio Theory” to set the asset allocation within each portfolio. Your investments (asset allocation) could be in mutual funds that invest in large-cap stocks, small cap stocks, bonds, real estate, foreign stocks, etc. This generally results in owning as few as 3 and as many as 11 mutual funds that are rebalanced once a year. Almost all portfolios will have an investment in a fund that mimics the S&P 500 index (large cap stocks) such as the Vanguard 500 fund (VFINX) and a small-cap fund such as the Vanguard Small Cap Index fund (NAESX). Several financial experts have recommended portfolios using the Vanguard Index funds and selecting funds based on Modern Portfolio Theory. Depending on which portfolio selected, you would buy the recommended funds and hold on through thick and thin. Let's look at how this strategy has worked through March 31, 2011:

Portfolio	# of Funds	1 Yr Return	3 Yr Return	5 Yr Return
Aronson	11	12.97%	3.1%	4.3%
Fundadvice	11	10.7%	2.1%	4.2%
Dr. Bernstein	9	10.4%	3.2%	3.9%
Coffeehouse	7	11.3%	3.8%	4.2%
Yale Univ.	6	13.6%	2.0%	4.1%
Dr. Bernstein 2	4	13.5%	2.7%	3.9%
S&P 500 Index	1	13.1%	1.0%	2.6%

The beauty of a Buy-and-Hold approach is that it eliminates fear, greed and any other emotion involved with investment management, but how comfortable are you earning nothing for the past 5 years? When your account is down 30% or more, it is hard to take a long-term view and stick with your strategy. This is especially true if you are retired and have to live off of your investments. It is also human nature to want to “do something” and be more active with your investments with the hope that by being more involved with your portfolio your results will improve. If you base your investment decisions on “gut instinct”, you are more than likely going to shoot yourself in the foot. Without a disciplined, well-defined strategy to actively manage your investments, you may end up even worse than doing nothing.

Active management of your investments generally means trying to buy low and sell high, or time the market. No market timing strategy is perfect, but the buy-and-hold approach also has its drawbacks as investors have learned these past few years. By correctly timing the market, an active strategy can help sidestep the market downturns while still participating in most of the upward trends. The object of market timing is not necessarily to “beat the market” as greater profits are not the main objective. The over-riding intention is avoiding losses . You want to concentrate on building wealth not rebuilding it.

The following are the hypothetical results of using one market timing model. You can compare buy-and-hold returns to the annual returns of the market timing program.

Many people in the Kalamazoo area have a “love relationship” with Stryker and it certainly has been one of the top individual stocks for many years, growing at 20% a year. “Buy-and-Hold” has definitely worked for many years if you owned Stryker. What if you bought it 5 years ago? You would have gained an average of 7.3% a year for the past five years. What if you were lucky enough to have picked one of the best no-load large-cap mutual funds five years ago? If you had selected the CGM Mutual fund (LOMMX) you would have been up over 5.0% a year while the S&P 500 Index was up an average of 2.6% per year. There has to be a better way than just trying to get lucky and pick the best stock and/or mutual fund. In the table below are the results of using a computer generated market timing indicator(SB5) as of March 31, 2011:

		Buy-and Hold	Market Timing
Asset	Symbol	5 Yr Ann Return	5 Yr Ann Return
Stock	Stryker-SYK	7.3%	22.2%
Mutual Fund	CGM Mutual	5.8%	5.8%
Large-cap Fund	SPY	2.6%	10.6%
Small-cap Fund	IWO	4.3%	5.5%

The results illustrate the benefits, at least in the past, of using a disciplined market timing strategy. Yes, the proponents of using modern portfolio theory claim all will be fine if you just invest for the long term. They may well be right, but many of us don't have 10 years just to break even. I personally believe that there are times to be in the market and times to be out and we will continue to see the cycles of the ups and downs in the future. Therefore I will be using computer-designed programs to tell me when to buy and when to sell. I'll never be right all of the time and past testing indicates that I will be out of the market and in money market funds almost 50% of the time. Time will tell if I am right.

Call me if you'd like to discuss in more detail my programs and what I am doing with my money in the future.

Charles Schwab & Company and other brokerage firms do charge fees and/or commissions for certain transactions. For example, to buy or sell a stock, they will charge $13.00 to $20.00 for up to 1,000 shares. I do not work for Schwab and I do not get any form of pay or commission from Schwab. I recommend and use Schwab because they provide a wide variety of investment products at low costs.

Thank you once again for your continued confidence and if I can be of help in any way, give me a call or leave an email message at chartwellfm@aol.com.

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