First and foremost, we practice dynamic – not static – asset allocation. This means when the market turns ugly, we move our clients' assets to the safety of money market positions, and stay there until the investing environment improves. It means we hold a select few positions in the best performing market sectors rather than many diverse positions in a cross-section of both weak and strong sectors.
The equity curves in the sidebar illustrate the principal difference between dynamic allocators, who retreat to money market positions when the going gets rough, and static allocators, who ride out the bad times.
Learn more about Static and Dynamic Allocation (16-slide Microsoft Powerpoint presentation).
Second, we trade ETFs and no-fee mutual funds exclusively – no stocks, no options, no derivatives. This means we achieve diversity without paying significant commissions. It means we can focus on only the best performers in the current market. It means we can invest in what we want without worrying about trading restrictions or redemption fees. It means we can use stop-loss orders to lock in profits or to exit positions with small losses before larger losses accumulate.
A Dynamically Allocated Portfolio from the Summer of 2006
The flat lines from mid-May to late August show when the portfolio was 100% in cash.
A Statically Allocated Portfolio from the Summer of 2006
The areas in red show where the portfolio followed the market into negative territory.