A crucial aspect of our approach is that we include all asset classes (e.g., stocks, bonds, cash and cash equivalents), rather than limit investments to only stocks. An approach that relies solely on stocks has historically suffered for prolonged periods. For example, during January 1st, 1966 through August 1st, 1982 the value of stocks, as measured by the S&P 500, rose only 4.1%* per year whereas the value of cash invested in 90 day Treasury Bills rose 7.7%* per year. In these 16 years, an investment made on January 1st, 1966 in cash (e.g., Treasury Bills) would have grown to be twice as large as an equal investment in the stock market. Our approach prides itself on constant vigilance, takes changes like these into account and adjusts the portfolio to include the asset classes in which the current market environments are most favorable.
The passive/strategic asset allocation keeps a fixed asset allocation. This means that the strategy will keep the asset allocation (e.g., the proportion of the investment that is stocks, bonds, cash and cash equivalents, etc.) the same regardless of the actual market environment. An approach that does not adapt to its environment would have suffered between January 1st, 1966 and March 1st, 2000. From January 1st, 1966 through August 1st, 1982 cash invested in 90 day Treasury Bills performed twice as well as stocks. However, from August 1st, 1982 through March 1st, 2000 the value of stocks rose 18.30%* per year whereas the value of cash rose only 6.79%* per year. In these 18 years, an investment made on August 1st, 1982 in the stock market would have grown to be over six times greater than an equal investment in cash. Our adaptive asset management approach takes into account these changing market environments and modifies your account portfolio to take advantage of the new environments and help you optimize your gains.
The Ad Hoc Asset Allocation approach varies its investment portfolio to try to optimize its gains. Unfortunately, this method is characterized by a lack of strategy. Usually the modifications to portfolios are done haphazardly and tend to be emotionally driven. Our Adaptive Asset Management approach carefully analyzes current market environments and only makes changes to the portfolio if the market environment changes. We do not change, just to change. We adapt.
The Tactical Asset Allocation approach is similar to our Adaptive Asset Management approach. Both approaches try to increase the return on your investment by analyzing the market environment and using this analysis to modify your asset allocation. In the Tactical Asset Allocation approach, market analysis is used to determine whether to deviate and how much to deviate from a benchmark asset allocation. In many cases this benchmark allocation is the optimal passive/strategic asset allocation (i.e., 60% stocks and 40% bonds). In a market environment very favorable to stocks, an individual following this approach might increase the stock investment to 80% and decrease the bond investment to 20%. In a market environment that is not favorable to stocks, the stock investment may decrease to 40% and the bond investment may increase to 60%. Even in the most extreme market conditions, only relatively small deviations from the benchmark asset allocation may occur.
Our Adaptive Asset Management approach believes that small adjustments to your asset allocation may not adequately take advantage of a new market environment because shifts in the market environment could have dramatic effects on expected returns. Instead we try to adjust your asset allocation in parallel with the change in the market environment. Therefore, in a very positive stock market environment we may have stock exposure over 100% by using options. However, in a very negative stock market environment we may have a negative stock exposure, equivalent to a "short" position in stocks. The goal of the Adaptive Asset Management approach is to not just beat the performance of a benchmark target allocation, but to maximize your investment's performance.
* All return calculations were done by WEGENER, LLC. We did not adjust our calculations for taxes or any other potential cost.
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