July 2007: Good News, Better News & As Good As It Gets - Winning By Not Losing

GOOD NEWS, BETTER NEWS & AS GOOD AS IT GETS

Good News: Asset Allocation Advisors’ managed accounts have achieved our goal of outperforming our benchmark, the Morningstar Moderate Allocation Category of similar balanced mutual funds. You received above average performance, after fees and expenses, without taking more risk.

 

 

Better News: Two and a half years ago, when we adjusted our investment strategy, we envisioned that we might be able to capture 80-90% of the returns of a rising stock market and be able to avoid 40-50% of a declining stock market. If we could do that, we reasoned that we might be able to do nearly as well as the stock market over a full market cycle spanning an up market and a down market. And, we felt this could be done with less risk, more safety, and greater portfolio stability that would provide a smoother, easier journey for our investors.

 

 

 

 

 

As Good As It Gets: Not surprisingly, our portfolios trailed the stock market the past twelve months -- a time of sharply higher stock prices. Our objective has never been to “beat the stock market.” However, over the past two and a half years, since adjusting our investment strategy, the typical Asset Allocation Advisors portfolio (with all earnings reinvested) has captured cumulative profits nearly equaling the stock market’s cumulative return (Standard & Poor’s 500).

This is about as good as it gets. It doesn’t get much better than having a balanced portfolio of stocks, bonds and cash match the stock market in a rising market while allocating only 55-60% of our overall holdings to stocks. We are grateful to have achieved this for you over the past two and a half years, but caution our investors to not expect this in every instance.

 

WINNING BY NOT LOSING

We believe that the most attractive feature of our investment strategy has not yet been displayed during the past several years (of a rising stock market). Our belief is that our strategy will shine brightest during a down market. The idea of doing well because of down markets may seem somewhat perverse, but it’s very simple. It’s a strategy of winning by not losing -- go up nearly as much in a rising market, but go down much less in a declining market.

"Our finding is that the main difference between average and superior long-term investment returns is not created during up markets; it is created during down markets."

If, after capturing all of a rising market, we can avoid a good portion of the next down market, our actual performance over the current market cycle -- a full up and down cycle -- will outperform the stock market. However, keep in mind that’s an "if," not a guarantee of any kind. As we often say in the investment world, "Stuff Happens." You just never know for sure

Even though no one can predict when the next down market will come, or how severe it might be, we know for sure that there will be another down market out there. That’s what markets do, they go up and down!

Our finding is that the main difference between average and superior long-term investment returns is not created during up markets; it is created during down markets. If the resilience of our portfolios during a down market is as we originally envisioned, and if we have already captured most or all of the profits in an up market, we believe you will be well on your way to enjoying superior long-term returns. Regardless, our two-fold investment objective was, is, and will be our guiding beacon: seek profits and protection of capital.

Thank you for entrusting your capital to us. It is an honor along with a considerable responsibility that we undertake in earnest. We are committed to improving and refining our investment strategy, the tools we use to apply it, and our understanding of investment markets in our ongoing effort to achieve your and our objectives of profits and protection of capital. We embrace the challenges of navigating through a continuously changing investment environment, and we look forward to sharing the journey with you. ***

Greg Schultz & Bruce Grenke
© 2007 Asset Allocation Advisors, Inc.