Investing so you can sleep at night

What Ken Kam is advising his own family.

By MSN Money Aug 18, 2009 5:46PM

When I was in Hawaii recently to celebrate my parents 50th wedding anniversary, I learned that a lot of my relatives are not sleeping well at night because their portfolios suffered a big setback last year and their advisors are telling them to "stay the course." They are afraid to stay in stocks because they can't afford to have another year like last year. On the other hand, they cannot stay in cash because money market rates are so low that they can't live off the interest.

They wanted to know what I thought they should do now. Here's what I told them.

 

Last year, two things happened that were thought to be nearly impossible. First, the market dropped almost 40% in a year, and second, we marked a 10-year stretch in which stocks lost money. The market is clearly more risky than anyone thought even for long-term investors. Our confidence in the market has been shaken and it has made us all unsure of were we stand financially. That's why no one is sleeping well at night.

 

You have to go back to 1929 to find another time like last year. It took over 20 years for the stock market to recover from that crash, and many who lived through it never invested in stocks again for the rest of their lives. Even though I think that was a mistake, going forward there are clearly going to be times when we don't want to be 100% in the market.

If we cannot count on the market to go up even in the long-term, then some of the most important decisions we need to make are going to be how much and when to be invested. These are not easy decisions and few people, even on Wall Street, have a good track record making them.

You see, the managers of index funds, ETFs, and most mutual funds don't make these decisions. Index funds and ETFs have to be close to 100% invested all of the time. If the market goes down 40%, index funds and ETFs will remain 100% invested all the way down. And, most mutual funds are required to be at least 80% invested at all times so they have the same problem. These products may no longer make sense for many people because they cannot do much of anything to protect you if the market falls again.

I went through Marketocracy mFOLIO Masters to find the ones whose long-term track records show they managed the downside well and still delivered strong enough returns to make a difference through one of the most difficult periods in the stock market's history.

The four that I like best at this time are: Chris Rees, Kevin Wilde, Ian St. Martin, and Jack Weyland. I have been tracking each of them for at least 7 years at Marketocracy.com. Over that time each has shown me an average annual return respectively of: 24.8*%, 17.14%, 22.01%, and 40.59%. Combined as a team there were only 2 occassions in the past 6 years when the teams losses would have exceeded 20%, and in both cases recovery was fairly quick.

 

My relatives need to stay invested in the market, but for them to be able to sleep at night, they need a strategy that protects them if the market falls again. I think the people who are best able to accomplish this for them are the people who have a track record showing they have successfully done it in the past. Of course, the future will not be exactly like the past, so I'll be monitoring the mFOLIO Masters perfomance to hold them accountable.

 

I am going to recommend these four mFOLIO Masters as a "Sleep Well At Night" or SWAN team for my relatives. I'll be presenting at the money show in San Francisco on Saturday at 5:45 pm, and Sunday at 10:40 am. If you are in the same boat and would like to hear more about the SWAN team please come to my session, or click here to be notified via email when I post a new article.

1Comment
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.