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How to Produce Consistent Results In Inconsistent Markets? For investors, 2015 was a rough year; commodities took a beating, treasuries lost, bonds have been volatile, and even Warren Buffett’s Berkshire Hathaway was down 11 percent! One can talk about all the inequities in the market, and how 2015 was one of the hardest years for investors since 1938. One can talk about how this has been the first losing December since 2002, or how the growth of the world’s largest economy has come to a sudden crawl! All these factors contributed to the volatility that investors experienced in 2015; however, none of these factors provide an answer to the basic question on everyone’s

PRECISION CAPITAL MANAGEMENT mind: “How do I make money, and how do I protect myself in this sideways and unpredictable market?” As an investor who relies on a portfolio for retirement income—an inconsistent market can be one of the biggest killers to one’s retirement. Studies have shown that losses early in retirement can be catastrophic to a portfolio. So, how as investors is one supposed to build a dependable and reliable stream of income throughout retirement when the markets behave erratically?

Every battle is won before it’s ever fought.” What the great Sun Tzu writes about in The Art of War holds true about investing, every portfolio is won or lost before the first trade is ever placed. In an annual study of investors conducted by DALBAR, the nation’s leading financial market research firm, DALBAR found one of the primary reasons why retail investors, or small investors fail is due to their investment process, or lack thereof. The DALBAR study found that most small investors made investment decisions based on their perceptions, or instincts about the market. This lack of process often leads investors to make decisions that are not in their best interests, and can lead to the all familiar cycle of buying high, and selling low.

Is the buying high/selling low cycle of retail investing inevitable?

- SUN TZU

hardwired to want to follow others. It is a survival trait that has served us well for millions of years, after all. If everyone is running, chances are a predator is close on your heels, so it is a sound idea to run with the herd.

However, when it comes to investing, herding can be the greatest driver of loss! Statistically, trend followers in the market, those who mirror the actions of successful investors, generally fail to realize the same returns. In fact, as you can see in the diagram below, by time the typical investor realizes that there is a trend to follow, it’s generally too late to profit from it…and since most investors don’t buy with an exit strategy in mind – they have no warning signal to tell them “hey, this bull-market is over, time to bail!”

When you consider the facts, what information do most investors have to base their investment decisions on? The sensationalist, rating chasing media? The gain/loss of the last market day? What concrete signals and experiences do small investors have to rely on? Often times the only signal that retail or small investors have to rely on is their perception of markets, do they think people are confident or scared? Do they think prices will go up, or prices will go down? Or in other words – following the actions of the masses, also known as herding. Herding is a phenomena that is found in all aspects of life, from animals in the wild, to drivers on the road, and even people choosing what to wear. We as a species are

FIGURE 1 Investors perceive an upward trend in the market (other people are confident, so they join in) and invest as the market is nearing its peak. However, since they don’t have any way to determine when to exit, most investors remain in the markets until it bottoms, losing most of their gains and usually a significant portion of their principal.

TA R G E T I N G S U C C E S S W I T H A P R E C I S I O N S T R AT E G Y.

Planning For Success In contrast, institutional investors take a different approach to investing. Since most institutional investors are investing for others, the first step in their process is to create an investment policy statement or IPS. The Investment Policy Statement is in essence a contract between the client and the investment manager. The IPS dictates all aspects of their relationship, including what the purpose of the investments are, how those goals will be accomplished, and what metrics will be used to determine success and failure. Statistically, by using a rules based approach to investing, institutional investors are able to realize greater returns

than retail investors by changing the paradigm from buying high, selling low to buying low and selling high. This does not mean that institutional investors don’t go backward, after all Warren Buffett lost $2.5 billion in a single week; however, by following a process that dictates their every investment action, institutional investors are able to shift the proportion of trades that are “wins” to their favor, and provide greater returns for their investors over the long term. Additionally, by following an investment policy that dictates their investment actions and incorporates downside risk management strategies, institutional investors are able to create a more predictable and consistent experience for their investors. To the clients on an institutional investment platform, their investment returns and losses will follow a predictable pattern that will correlate to investment benchmarks. This consistency allows investors to predict and take comfort in their investments. (See figure 2) In contrast, investors on a retail or simple investment platform will see scattered results, with unpredictable and uncorrelated gains and losses. The lack of consistency in their investments will provoke anxiety in most investors and cause them to continually switch investments strategies and remain in the paradigm of buying high and selling low.

FIGURE 2 As you can see in the hypothetical illustration above, the institutional platform provided a consistent risk/reward experience, i.e. aggressive strategies made more money than the moderate, and the moderate made more than the conservative, creating a slope of return. However on the retail side, the returns don’t follow the same pattern of risk/reward, instead of the predictable slope one sees scattered and uncorrelated results.

As the DALBAR study demonstrates, simply having a sound investment policy that dictates your investment actions can make all the difference for an investor. For those in, or near retirement a significant loss in the early years of retirement can be the difference between running out of money or leaving a living legacy for generations to come.

WHICH STRATEGY ARE YOU USING? Consistent & Predictable or a Hope & Prayer? The Choice is Yours! Discover a better way, call today and learn more about how Precision Capital Management is bringing institutional investing to everyday investors. Discover how to create a consistent and predictable investment strategy that incorporates downside risk management.

DISCOVER A BETTER WAY.

Investment advisory services are offered through PCM Advisory, LLC dba Precision Capital Management, an SEC registered investment advisor. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration is not an endorsement of the firm by the commission and does not mean that the advisor has attained a specific level of skill or ability