The first step to Successful Investing is to identify the Market's "Big Picture" Environment in terms of risk versus reward. This is critical to success over the long term because different "environments" require different strategies. For example, in Bull Markets the objective is to maximize returns, while success in Bear Market Environments demands an emphasis on capital preservation. By reviewing the Environment every single week, we are assured that we will remain "in-tune" with conditions and not be surprised by environment changes.
At the center of our risk management work are our TopStock Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.
Executive Summary For December 17, 2008
Managing Risk is Vital
Our disciplined approach to managing risk is designed to keep our Portfolios "in-line" with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.
The keys to our Risk Management strategies are our two proprietary Risk Management Systems. Both systems are sophisticated Models incorporating the entire spectrum of market indicators. Our disciplined, professional systems act as our primary guide to exposure to market risk.
Risk Manager Systems Summary
Graduated Exposure System (Intermediate Term Time Frame)
Our Graduated Risk Manager System is a disciplined approach to Risk Management and is designed to keep portfolios "in-tune" with the overall condition of the Market at all times.
The System is a Model comprised of of 12 independent Models. Each model includes is successful in its own right and gives separate buy and sell signals which effects a set percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, and Trend & Breadth Confirm) control a total 40% of our exposure. The 3 Momentum Models control 10% each and our 5 Environment Models each controls 6.0% of the portfolio's exposure to market risk. The model's "Recommended Exposure to Market Risk" reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.
Long-Term "Big Picture" Trend System
Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 2 to 3 adjustments per year), our "Big Picture" Trend System focuses on the overall Environment of the market. The goal is to identify the "Major Trend" of the market and keep portfolios on the "right side" of the market's current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of "the tape," monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership. Since 1982, the model shows a gain of +18.04% per year* (in its most conservative form and +26.7% for the aggressive version) versus +9.93% for the S&P 500.
When the Environment is rated as "positive" (about 32% of the time) our studies have shown that the S&P has advanced at a rate of +38.4% annually. However, when a negative environment exists (about 20% of the time) the S&P loses almost -21% per year. The Model recently signaled an end to the Bear Market by flashing a buy signal on March 13, 2003 with the S&P 500 at 833.27.
What To Do With The Data?
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