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Focus on Future When Allocating Your Investments

Tuesday, 11 Jan 2011 01:49 PM

Many investors often pay more attention to economic and geopolitical developments that happened in the past, and to factors that tend to minimally impact the future direction of various asset classes (i.e. stocks, bonds, commodities), instead of focusing on factors and developments that tend to determine the future direction of stocks, bonds, and other financial market assets.

For example, rather than focusing on the positive impact that the recently enacted tax bill will likely have on the U.S. economy and the direction of stock prices during the months ahead, many investors are currently paying more attention to the weak employment market in the United States, the sovereign debt situation in Europe, and the massive amount of new money that the Federal Reserve created during the past three years.

In addition, many of those same investors appear to be overlooking the likelihood that the employment situation will improve during the months ahead, that Europe’s debt situation will likely have little impact on the U.S. economy, and that later this year the Fed will likely reduce the amount of money that banks will have available to lend.

Some investors are also focusing on the large number of home foreclosures that will likely occur during the first six months of this year rather than on the likelihood that the housing market will begin to recover during 2012.

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Because of their misdirected attention, and their focus on insignificant variables, many investors often buy investment securities only after they’ve already appreciated substantially and then sell those same securities near their market lows. Many people also tend to invest the majority of their money in certain asset classes and market sectors at the wrong time.

I, on the other hand, always focus the majority of my attention on factors and developments that will likely affect the future direction of the economy and securities prices, and I largely ignore factors that are no longer important.

For example, during the autumn of 2007 I focused on the fact that most leading economic indicators were suggesting at that time that the U.S. economy would soon enter a recession and that stock prices would decline sharply during 2008. I therefore advised persons that subscribed to my investment newsletter, The ETF Strategist, to allocate a large portion of their financial market assets to cash-like investments (i.e. money market securities) and to sell stocks short (via inverse-equity ETFs).

Likewise, I recognized during early 2009 that a large number of leading economic indicators had turned positive and that numerous economic and geopolitical factors suggested that the U.S. recession would end during June 2009. Because of those forward-looking factors and developments, I advised my newsletter subscribers to invest 100 percent of their financial market assets in equity securities.

As a result of my decision to ignore the past and to focus on the future, my model portfolios substantially outperformed the S&P 500 Index and most equity mutual funds during the past three years. In fact, both my Conservative and Aggressive Portfolios generated a positive return during the three years ended Dec. 31, 2010, while the S&P 500 Index returned negative 8.3 percent and Warren Buffets’s Berkshire Hathaway lost 14.9 percent of its value.

Although my investment recommendations underperformed the S&P 500 during 2010, my market-cycle approach to investing in the financial markets have also enabled my recommended investments to outperform the S&P 500 and most equity mutual funds since the inception of The ETF Strategist on Sept. 18, 2007.

If you’re unfamiliar with the term market-cycle investing, that phrase refers to a strategy that attempts to participate in major upturns and to avoid major downturns in the financial markets.

That strategy also involves investing in asset classes and market sectors that tend to perform best during certain phases of the economic cycle and to avoid those asset classes and market sectors that appear to have run their course.

For example, my research indicates that the U.S. economy will not experience problematic increases in inflation rates for the foreseeable future and that gold prices are in the process of peaking. I’m therefore advising my newsletter’s subscribers to sell gold short via an inverse-gold ETF.

Note from Moneynews:

If you need some help in determining in which sectors of the equities market to invest, try a free sample of David’s investment-advisory service, The ETF Strategist. Click Here to Find Out More.

About the Author: David Frazier
David Frazier is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes two very successful investment newsletters. Discover more by Clicking Here Now.

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Many investors often pay more attention to economic and geopolitical developments that happened in the past, and to factors that tend to minimally impact the future direction of various asset classes (i.e. stocks, bonds, commodities), instead of focusing on factors and...
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Tuesday, 11 Jan 2011 01:49 PM
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