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Dow Jones Historical Trends

History shows that this market typically moves in cycles. In attempting to understand how to direct a portfolio in today's choppy waters, it is important to obtain, or maintain, your perspective. In gaining perspective it is often helpful to review long-term historical trends. The chart to the right represents 113 years of the Dow Jones Industrial Average's history, and this chart is organized by multi-year periods of bull cycles (shown in green)  and bear cycles (shown in red). Within these multi-year cycles there are periods of shorter-term bull market and bear market cycles. It is common to refer to these shorter cycles as cyclical. Therefore we'll call them cyclical bull markets and cyclical bear markets. The multi-cyclical periods in this chart are commonly referred to as secular cycles, therefore we can also have secular bull markets and secular bear markets.
In my view, recognizing these secular trends, and acknowledging them, are very important in determining how to direct portfolio actions through difficult markets. Investment strategies that work in bull markets may not be as effective in flat or downward trending markets, and visa-versa. The panel to the right details several actions which an investor, or an advisor, may take based on their desire to recognize, and to acknowledge, the type of market cycle that is currently in play. The concept is easy to articulate, and not as easy to implement, especially in a Secular Bear Market. In either case, it takes a bullet-proof investment discipline, and the courage of your convictions. And even then you probably will not be content with many events as they impose themselves upon your portfolio. Since I believe us to be operating in a Secular Bear Market, why don't we spend a few words on the bulleted items to the right. First and foremost, we should be focusing on Real Returns and Wealth Preservation - seems logical. So what is the strategy, and what are the triggers to try to bring those goals to fruition? That is the $100,000 question! There have been many strategies and analyses developed over many more years, so no panacea here. For me, I try to stay invested, and true to my allocation discipline, however there are times, especially during extreme volatility, when precautionary measures ought to be taken. For instance, after a strong rally with an overbought indication, it might make sense to raise some cash [sometimes as much as 40%], take some profits [if they exist], and wait - and keep waiting - until the market tension resolves itself. The key here is avoidance of big losses! If the gains are going to be smallish, you need to hold on the as much of those as you can, for as long as you can, but it is imperative to avoid the downside surprises. You may also miss some upside surprises as a result, but this is acceptable in this type of market cycle.  Wealth Preservation is more of a priority that Wealth Accumulation in Secular Bear Markets. Now for the third bullet, Non-correlating Assets, good luck. It is difficult to find value in this area, be patient. It seems that all equity markets are tightly correlated right now. Bonds seem to be "bubbling", highly priced, and ripe for a fall. But they could go higher, because demand seems to be strong ... until it's not. The same holds true for gold and other precious metals, they may help your diversification, but it is also not exactly a secret. It the economy recovers, and another strong Cyclical Bull Market develops, you could get hammered. Be careful !! The general rule ... if everybody's doing it, there is probably not much value left. The fourth bullet. A Dynamic/Alternative Approach is code for "... our new product we developed to help you through the scary times ..."  By the time these new products start to show up in the marketplace you can bet that most of the scariness will be gone. In reality, it means Hedging, not a bad idea, but in my opinion, a little late in this market cycle. This is a good one to remember though for the next time, but get some professional help with this one.

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- Chuck

Disclosure: Disclosure: No Stocks Mentioned