Traditional Portfolio Asset Allocation Strategy
Typical asset allocation strategies invest mostly in Large Cap, International and Intermediate Term Corporate Bonds. There equity position and sector allocation positions stays consistent with their risk level thru the year.
PDM Investment Strategy
Our strategy has higher positions in Mid Cap, Small Cap, Technology, Financial, Healthcare, Asia and High Yield Bonds than traditional asset allocation strategies. We apply tactical asset allocation for risk management, strategic sector asset allocation through the year as conditions change and use mostly active managed funds.
PDM Investment Services has a pro-investor structure. We are independent and have an open architecture. We are not pressured into pushing high cost investment products like loaded mutual funds and annuities. We do not have limitations on which stocks and mutual funds we can purchase. Your investments are held in your custodian account for transparency.
Our strategy is based on growth at a reasonable price. We seek out managers of sound investment strategies that consistently outperform the market without taking on additional risk. We use investment strategies that have been used for years by the most successful investors. We are always searching for the best investment research to enhance our strategies. We are always searching for the best fund managers, advisors and newsletters and read investment books looking for ways to enhance our strategy. Thru experience, it is our belief the best way to get rich is to use good time-tested investment strategies and stick with them.
We do not use risky strategies like derivatives, margin, options, shorting stocks, leverage and penny stocks. We only use strategies and invest in securities we would personally invest in for ourselves. PDM Investment Services practice a pro-investor structure offering independent advice, open architecture, transparency, liquidity and low cost solutions. All of the client's portfolio transactions and holdings are accessible to them thru their custodial account.
Thru our experience, we believe the total stock market, asset allocation, security selection, portfolio management and advisor structure all affect portfolio performance.
Our tactical model sets up our stock, bond and cash allocation. The allocation model sets up our sector and asset allocation. Our stock and mutual fund rating systems tell us which stocks and mutual funds to invest in. Our strategies are employed using low-cost custodians to keep transaction costs low and no-load mutual funds.
To create and manage a portfolio that outperforms its benchmark requires luck and skill. Luck is needed to overcome all the variables we have no control over like the economy, world markets and company manager decisions. Skill comes from analysis, behavioral understanding and sticking with a solid investment plan.
We use the time-tested strategies listed below
- Tactical Asset Allocation & Risk Management
- Strategic Asset Allocation
- Strategic Sector Allocation
- Security Selection
- Low Cost Investments
- Fundamental Analysis
- Valuation Analysis
- Technical Analysis
- Investor Psychology
- Growth Trends
- Market Cycle Indicator
- Active & Passive Managed Investments
- Low Turnover
- Concentrated Strategy
- Management Ownership
- Cycle & Seasonality
PDM Investment Services does not in any way guarantee the portfolio from loss, nor guarantee any minimum investment performance for client portfolios. Investing in securities involves risk of loss that clients should be prepared to bear. PDM Investment Services shall be responsible only for the satisfactory performance of all duties expressly assumed. Past performance is no assurance of future results. All investments involve individual security risk and market risk. Recommendations and advice are given with the understanding that the client assumes all risks involved. Always consider investment objectives and risk before investing. Investing in individual stocks generally carries more risk than diversified mutual funds. It is not recommended to invest more than 3% of a portfolio into any individual stock.
Tactical Market Asset Allocation and Risk Management
Our Long-Term Market Indicator sets up the stock market exposure for our portfolios around the define base risk level.
We attempt to reduce stock market exposure during periods of high risk and recessions and raise exposure during periods of low risk. We also use other top timing models to check against our model signals. The model is based on inflation, interest rates, economic growth, earnings, technical, relative strength, sentiment, valuations, cycles & seasonality and global crisis.
Being in the market at the right time can help avoid bear markets and control risk. We do not try to time corrections because they are impossible to time consistently. Short-term timing can be costly due to transaction fees and taxes. The S&P 500 Total Return (PREIX) has seen negative return years 27% of the years from 2000 thru 2014. We only focus on timing major bear and bull markets, not corrections. We have seen 1 or 2 bear markets (20% or greater decline) each decade since the 1970's.
The indicator is used to signal the risk of a Recession Bear Market (> 20% prolonged losses, 2000, 2008), not Correction Bear Markets (>20% loss, 1987, 1998, 2011, 2016) and not Corrections (10% to 20% loss). A positive reading means an increased probability of positive stock market returns. A negative reading means a decreased probability of positive stock market returns. These indicators are not a forecast, but more of a probability of future returns. The indicator may not work in this post debt bubble environment.
The primary risk to portfolio performance with tactical allocation is you must be correct when to reduce equity exposure and correct when to increase equity exposure to see its benefit after transaction costs. It takes one type of brain to sell at the top and another type of brain to buy at the bottom, making this difficult to execute. Timing models that worked in the past, often do not work in the future. Very few mutual funds and investment newsletters rated by Morningstar and Timer Digest outperform the market using timing. Most Tactical Allocation funds do not outperform Moderate Asset Allocation funds. (GTAA, IASRX, PASDX) Leuthold Core Investment (LCORX) performs well.
Tactical asset allocation is rarely successful because it takes a different mindset to buy at the bottom then it does to sell at the top. The strategy typically underperforms during bull markets and outperforms during bear markets. From experience, we believe very few indicators have predictive powers. Market timing systems have a way of breaking down if not constantly evaluated and adjusted for changing world economic and investment conditions. The low and negative interest rate environment we are seeing now could make bear markets more difficult to predict. The world continues to evolve and flatten and new investment methods and systems are added. A better strategy for most is to build a portfolio that you can live with through the market's ups and downs. Even if you had the holy grail of a timing system, you may not act properly on the sell and buy signals due to your emotions.
Strategic Asset Class & Sector Allocation
Our Strategic Asset Class & Sector Allocation Model sets up the percent of cash allocated to each asset class and sector in a portfolio.
The model is based on fundamental, valuation, technical, relative strength and past performance.
Asset allocation is a systematic way of diversifying a portfolio among different asset classes with varying correlations to each other. Asset allocation determines the mix of asset classes and sectors used to create a portfolio to meet its specified goals and risk level. The most common asset classes are large cap growth, large cap value, mid cap growth, mid cap value, small cap growth, small cap value, international, sectors, bonds and cash. Some sectors perform better in some parts of the economic cycle and worse in other parts.
Diversification of non-correlated asset classes will help reduce volatility in a portfolio. Diversification is not a return-enhancement tool it is a risk-reduction tool.
Our portfolios invest in growth sectors like technology, healthcare, financial and Asia. Why invest in the S&P 500 and mutual funds that contain all sectors, including the slow growth ones. Our top-rated sector mutual funds and stocks are used for each sector. With sector mutual funds you get the best managers for each sector compared to one manager that knows a little about each sector in diversified funds.
The primary risk to portfolio performance is selecting the wrong asset class or sector at the wrong time.
Enhanced Security Selection
Our Mutual Fund Selection Model rates each active managed mutual fund and passive managed exchange traded fund.
The model is based on fundamental, valuation, technical, relative strength and past performance. Mutual fund analysis also includes Morningstar ratings, manager, strategy, expense ratio, risk, valuation and risk adjusted return. We overweight the high relative strength leaders in each asset class in our mutual fund portfolio.
The goal is to select the best investments in each asset class. We look for high performance (alpha), consistent performance, high-risk adjusted returns (sharp ratio) and a solid strategy in mutual funds, ETFs and stocks.
For individual stocks, we look for growth companies with strong and consistent revenue and earnings growth, an expanding or steady pretax profit margin and a return-on-equity that is steady or growing. Companies are purchased at a reasonable price and at a favorable reward-risk ratio.
The primary risk to portfolio performance is selecting a security that underperforms its expectations.
We invest in no-load mutual funds and stocks using a discount broker as custodian..
Fundamental Analysis (What to buy)
Fundamental analysis is an approach that is primarily concerned with earnings, revenue and cash flow. This approach examines factors that try to determine a firm's expected future earnings. Some of the key fundamental indicators to consider are consistent revenue and earnings growth, earnings surprises, earnings expectations, cash flow, valuation and a fundamental price target.
Valuation Analysis (When to Buy)
Value analysis involves investing in equities you believe are undervalued using the price-to-earnings ratio, price-to-book ratio and price-to-cash flow analysis.
Technical Analysis and Relative Strength (When to Buy)
Technical analysis is an approach that tries to predict the future direction of equities based on past price and volume changes. The assumption is that equities follow a pattern. Some of the key technical indicators are trend lines, moving averages, support and resistance lines and momentum oscillators. Trend lines show support and resistance for the stock price.
Investor psychology shows the mood of investors. Investor psychology can help determine stock market peaks and valleys. At market bottoms, investor psychology is at extreme low levels. At market tops, investor psychology is high. Some of the investor psychology indicators we use are the High/Low Logic Index, Investor Intelligence, Volatility, Insiders, Smart Money, Sentiment and the Overbought/Oversold Indicator.
Getting in and out of an explosive growth trend can enhance your portfolio returns substantially. Identify new disruptive technologies and the dominant players to invest in as the growth trend takes off. Once the growth trend matures, exit the trend. Some of the most significant growth trends of the past were the personal computer, cell phone, internet, biotechnology, the mutual fund, hand held GPS and smart phones. How would you like to have invested in the market dominators in these industries when their prices were low? You could have bought Apple, Google, Amazon, Facebook, Microsoft, and Netflix just as they started their huge rise.
Market Cycle Indicator
Economic cycles follow similar patterns. Like John Templeton once said: "Bull markets are born from pessimism, grow on skepticism, mature on optimism and die on euphoria". In secular bull markets, cycles are longer and in secular bear markets they are shorter. They start with a Recovery, seeing a sharp increases in stock prices off the oversold recession bottom. Then comes the Transition Phase where the market consolidates. Next comes the Capital Goods Phase where the economy is growing strong. Then the cycle ends in Recession. It is common to see corrections during a cycle. See the chart below of the market cycle that started in 2008 and will end in recession in the next few years.
Active & Passive Managed Investments
We use mostly active managed funds that have a sound investment strategy, strong management, management tenure, a low expense ratio, smaller size, lower turnover, outperforms its benchmark over 60% of the years, have a good risk adjusted return and is at a reasonable valuation.
We use passive ETF's and index funds in some asset classes where it makes sense. It is very difficult to find active managers who consistently add value relative to its appropriate benchmark. Only about 20% of active funds outperform their passive benchmark funds each year and only 5% of these active outperform passive funds consistently each year. Active funds have higher costs, but provide the opportunity to outperform their benchmark. Portfolios with passive ETF funds are easier to implement and manage than active fund portfolios.
Morningstar research suggests low turnover tend to outperform high-frequency trading strategies. Higher fees, transaction costs, taxes and poor judgment cause high-frequency trading strategies to suffer.
Morningstar research suggests strategies with less-than fifty stocks offer a greater chance of outperforming their benchmark. Over diversified strategies tend to perform at or below their benchmark.
Morningstar research suggests strategies with high insider and manager ownership tend to outperform their benchmarks. Managers that believe in their strategy will invest their own money in the strategy.
Cycles and Seasonality
Our research suggests, there are distinct cycles that tend to affect the stock market. The market moves in long-term secular cycles creating and removing excess. The market cycle indicator is used to determine the stage of the economic cycle. The decade cycle shows the years within the decade the stock market tends to perform best. During the four-year election cycle, some years have better stock market performance than others. There are time periods like October through April that the stock market tends to outperform. Some months outperform other months during the year. A positive January often leads to a positive year.