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Clear Thoughts
Is the market getting you nervous?
Originally Published Friday, April 15, 2005
| When the market drops many investors let their emotions influence their decisions. This approach does not produce benchmark beating returns in the long-run. How do we deal with a volatile market and what drives our decisions during its ups and downs? |
The Dow is actually lower than the day we launched.
When the Dow goes down and the Nasdaq seems to have given up hope, what do smart investors do? We believe, emotional, performance chasing reactions are not the best course, especially if you want to make or stay on the coveted "millionaire household" list which we discussed in our 4/1/05 portfolio review.
Let us refresh our collective memories:
"Most of these millionaires are older, experienced investors who are in the stock markets for the long haul and largely ignored the recent ups and downs."
At Clear Asst Management, every morning we come in to our office and look at our core portfolio manager. It is a nameless, faceless, computer. We don't even want to give it a name! Unlike the tin man of the Wizard of Oz, our computer doesn't seek a heart. It doesn't want thanks, understanding, congratulations or anything else, it wants nothing. To perform, it requires electricity, a cool dry environment, and high quality data.
The computer does what we programmed it to do, crunch the numbers, screen the companies, employ algorithms to rank and weight all 130 stocks in their respective portfolios, and then watches and waits. It doesn't even wait patiently. It just doesn't care, and we like it that way!
We as mere humans, care, react, and get concerned. We watch and worry as the market gives back all its returns since the presidential election, including yesterday's 125 point drop in the Dow.
Our computer, on the other hand, incorporated every piece of data (from Standard and Poors) on the market and made its cool, calculated decision after yesterday's 125 point drop. What did it decide to do this morning? Absolutely nothing!
We notice the computer looks a lot like these older millionaires. Then we look back at our long term performance and see the similarities. We remember why and how we founded this firm. Certain other emotion sets in, we feel comfort.
Let us take a look at some of Clear Asset Management's performance numbers. In aggregate, in the 60 month time frame of our extensive testing we outperformed the market, meaning our focused benchmarks, in 37 of the 60 months.
Guess what, this means we underperformed in 23 of those months!
Since live money inception, in aggregate, we have beaten the benchmark, in 6 out of 7 months.
The question is how do you gain the benefit of the 37 benchmark beating months? The answer is to remain 99.5% invested and not to watch the market on a daily basis, and if you feel compelled to watch the markets, remain unemotional.
Understand there will be volatility, there will be losses. During our extensive testing, our Small Cap Value portfolio for example, has the honor of having had both a monthly increase of 23.1% and a monthly loss of 20.5%. Since live money inception, however, its performance is more than double that of its benchmark.
Our computers do not flinch, and neither do the best investors. Our computers actively manage the portfolios. Let them do their job, and as longer-term investors, we strongly believe we will do well, and beat the benchmarks.
Remember, we have our own money in the portfolios working along side yours.
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