Many investors have had a verybad experience in the stock marketas a result of an undisciplinedmoney manager or stockbroker.Although this experience should causeyou to become more cautious, it shouldn'tcause you to throw in the towel. Manyphysician-investors have experienced thatthe buy-and-hold brokerage philosophy isa flawed strategy. They're realizing a needfor selling rules and discipline.
Have you seen the stock market reboundingsince March? Do you feel anxietyas to what you should be doing? Manyinvestors have lost faith in their currentadvisor or broker, who lost them a lot ofmoney. They're finding it difficult to makethe necessary adjustments to rebuild theirportfolio and financial future.
Advisors and brokers relied on risk-controllingstrategies that weren't supportedby market history. Let's take diversification,for instance. An investor could havea very wide variety of stocks (eg, technology,conglomerates, utilities, oil, retailers,automotive, and medical) and the portfoliowould still take a beating during a bearmarket. The fact is, 4 of every 5 stocks godown in a bear market. The only way tocombat a bear market is to step aside untilthe market stabilizes.
the buy-and-holdstrategy. Brokers sometimes say,"You're a long-term investor, right? Justgive the stocks time and they will comeback." The problem with this is that newleadership always emerges from eachbear market. Superior returns require investorsto find the new leaders of themarket cycle. Some old leaders willrecover, but the majority has no gas leftin their tank. In fact, during a bear market,leading stocks average a 72% loss invalue from their high and only 30% ofthe stocks reach their high again. Thisincludes all those "invincible" stocks inyour current portfolio.
Fortunately, there are solutions to preventrepeating the same investment mistakes.In the past 3 years, losing more than15% to 20% of holdings in the stock marketis unacceptable. An ideal, disciplinedstrategy should be designed to step asideduring bear market declines to avoid losingmoney. The same strategy should bedesigned to invest in the market leadersduring a bull market rally. This is not daytrading; rather, this method takes advantageof intermediate, reliable trends.
A good system should take advantageof disciplined selling rules. Many brokersdon't follow such rules, so their clients'portfolios were left exposed during thebear market crunch. In fact, many of theseportfolios were overweighted in technology,which should be a clear sign of aninexperienced advisor with no selling disciplineor risk protection. A methodical,well-focused approach should managerisk while obtaining the highest growthappreciation that many need for theirretirement and future.
It would be a mistake to form conclusionsabout the market based on 1 of themany bad apples in the industry of moneymanagement. Instead of writing offstocks, which is historically the best investmentvehicle, evaluate a method that controlsoverall risk and generates largegrowth during optimal times.
Michael Doran is a privatemoney manager affiliated withSierra Capital Planning in northernCalifornia. He runs a fee-basedbusiness and a hedge fund forqualified investors. For more information,call 877-467-8657 or visit www.sierrainvestor.com. Christopher Nezbeth also contributedto this article.