How to NOT Lose $5 Billion

Tim Fortier  |

“It’s a dangerous business … going out your door. You step on the road, and if you don’t keep your feet… there’s no knowing where you might be swept off to.”

― J.R.R. Tolkien, the Lord of the Rings

How true for all investors over the last year or so. It’s been difficult for anyone trying to “keep their feet” as the financial markets have swept investors all over the place. Even Bill Gross—the Bond King—with over $244 Billion in the Pimco Total Return Fund--faltered last year.

In prior years he outperformed his competition by 97%. And last year, he trailed 69% of his peers according to Bloomberg. The Total Return Fund had a paltry result of 4.2% compared to its 5 year average annual return of 8.1%.

For over four decades Pimco has dominated the bond markets. And according to Bloomberg—last year was the fund’s worst performance relative to its peers since at least 1995. And Pimco lost over $5 billion in client withdrawals. What happened?

Pimco started moving away from treasuries while pushing their strategy into stock funds, exchange-traded funds and other assets outside of fixed-income. And they missed a treasury rally that returned 9.8% for 2011.

This is just more evidence for staying on a well trodden path … a proven system. If you don’t, there is a greater chance you will “lose your feet”.

In all honesty … Pimco is a smart outfit and they will eventually get through the changes in their approach. But it does illustrate a point. When you find a system that works … stick with it!

I use a variety of systematic approaches. And some of my favorites are simple moving average and relative strength based systems. Last year my systems provided some really nice returns – the Vanguard Tactical Asset Allocation gained 12.30% and the emerging market ETF program bucked global trends and finished 17.30% higher. Yet … I still had one or two trusted systems that struggled – Sleep Easy, a flagship strategy had its first losing year since 2003, down -0.20%.

So … do I rush out now and change the ones that struggled? No! …and No again!

It’s easy to get frustrated and impatient when results don’t come as quickly as expected. And most investors think a change in approach can "fix" their portfolio.
But … if you have a good system in place … any alterations to the approach could do more harm than good!

Don't get me wrong, it’s important for any investor to critically assess their chosen investment approach. But if the strategy was well chosen to start with … changing it won’t be necessary.

Here are some questions I use to assess my systems, and you may find them valuable as well.

1. Is the system well grounded? Is it supported by academic research or professional investor experience? If yes, I move on.

2. Does the system have a positive mathematical expectation? Does it have a degree of certainty for positive outcomes? If yes … I’ve got a system I can work with.

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And despite an intense desire to tweak or change the system … I don’t mess with it! Altering a system that works introduces new levels of complexity and unintended consequences.

If you asked yourself the questions above and answered “no” to any of them … it’s time to take a deeper look at your system. Or build a new one.

And as I mentioned before—simple relative strength and moving average systems are a great foundation. These are well-grounded systems with both academic and professional investor research that can help you “keep your feet” in this dangerous business.

In the interim … you can also learn more about my trading systems at Portfolio Café.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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