The Quick Guide to Risk-Managed Investing

By David Cretcher

Do you want to take charge of your investments, but don't know where to start?

Are you having trouble trying to navigate your way through today’s turbulent markets?

Do you have a financial advisor you trust, but don't understand what you're told or sold? Or worse, what you're being sold makes sense, but isn't working.

Have you taken an economics class, but still don't understand how the economy really functions?

Do you have a 401(k) plan but no idea where the money should be invested?

Have you suffered poor success with traditional investment solutions like asset-allocation, age-based portfolios, and efficient frontiers?

Did your “Conservative” asset-allocation tank during the financial crisis?

This book will change the way you think about your investments and allow you to invest with confidence and avoid surprises.

YOU WILL LEARN:

How to understand the economy without charts and graphs using a simple mechanical model

Why stocks are over promoted and riskier than you are being told.

The two liquidation behaviors that most affect your investments.

How money pressure drives the economy causing stock prices to increase or decrease, goods and services prices to rise or fall, and money to be created and destroyed out of thin air.

The two economic risks every investor must understand to protect themselves.

The two opportunities investors want to capture.

How you can control your risk by using counterbalancing investments to build an all-weather portfolio.

Why compounding is a sales tactic that doesn't work for the average investor.

How to develop a portfolio strategy that changes as the economic risks change. You'll never have to sit and take it again.

The four new asset classes you must know to protect your assets against economic and market turbulence.

• Language: English
• Publisher: David Cretcher
• Release date: May 12, 2012
• ISBN: 9781476314143

David Cretcher

David Cretcher is an investment strategist for individuals and small businesses. He is the director of Weather Eye Advisors,Inc. a non-profit Registered Investment Adviser. He specializes in the economics of money pressure. He has an A.B. in Economics from Miami University and an MBA from Ohio State University. He can be reached at [e-mail].

Book preview

THE Quick Guide to

RISK-MANAGED INVESTING

How to Invest in Today's Turbulent Markets

By

David Cretcher

Copyright 2012 by David Cretcher

Smashwords Edition V 1.2

Smashwords Edition, License Notes

This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.

Table of Contents

Title Page

Chapter PREFACE

Chapter INTRODUCTION

Chapter One - BUILDING PORTFOLIOS WITH RISK-BASED ASSET CLASSES

Chapter Two – FLOTATION

Chapter Three - POWER

Chapter Four – WIND

Chapter Five– WEIGHT

Chapter Six – COUNTERBALANCED PORTFOLIO DESIGN

Chapter Seven – Appendix: HOW MONEY MAKES THE WORLD GO ROUND

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Chapter PREFACE

If you’re having difficulty managing your assets in these turbulent times, you are not alone. Most investors are challenged and troubled these days. The advice they receive from advisers, friends, and the media often doesn’t make sense, or worse yet, doesn’t work.

This book seeks to solve these problems by getting past the investment industry hype and providing the average investor a simple method to construct risk-managed portfolios that work in these turbulent and difficult markets. It explains how to construct a portfolio using alternate methods from those commonly promoted by investment advisers and financial theorist.

This book shows you how to design portfolios based on counterbalancing asset classes and economic risk versus blindly allocating your wealth within a colorful pie chart of traditional asset classes like stocks, bonds, and commodities.

This book is valuable to investors looking for a better solution after having little success with common portfolio strategies like asset allocation strategies, age-based portfolios, efficient frontier or other theory-based strategies.

Chapter INTRODUCTION

At the least, a well designed portfolio must protect the investor from two major risks. First, the risk inflation devaluing the worth of the money the portfolio is denominated and second, the risk of deflation devaluing the worth of the investments in monetary terms. Inflation devalues the portfolio when the portfolio assets can be sold for the same amount of money or more but the money received is not worth as much as the initial investment. Deflation devalues the portfolio when the money is worth as much or more, but the investments themselves are worth less money. The effect is the same - the investor loses.

A well designed portfolio should also capture the economic growth generated from the expansion of the economy and the gains from asset price inflation or the relative increase in asset prices driven from increased enthusiasm for the asset by the investing public.

Most popular investment methods focus solely on capturing the last two forces, economic growth and asset price inflation, and ignore or under-estimate the risk of inflation and deflation. By doing this they leave the investor without any protection from inflation and deflation.

In the 1960s and 1970s, investors lost money when inflation devalued the stock market. The market was relatively flat at a time monetary inflation was moderately strong. In the 2000s investors lost money when deflation devalued the stock market the market was flat at a time that inflation was relatively weak. In the later part of the decade, financial asset prices declined rapidly as financial asset prices deflated from a lack of money pressure in the economy. Modern portfolio design under-estimates these forces.

The main failure of these orthodox portfolio strategies is an over reliance on financial theory that doesn't work in the real world. These theories rely on mathematics, and the use of statistical bell curves and volatility measures to manage portfolio risk. According to modern financial theory, the markets act like a gambler rolling dice. Risk is defined as the amount of fluctuation the investment normally experience or how far the dice roll lands from the average.

According to theory, stocks are riskier than bonds, not because bonds have a promise to return an investor's money and stocks don't, but because the historical prices of stocks fluctuate more than bonds. Within the theory, rolling one die with an outcome between one and seven is less risky than rolling a pair of dice with an outcome between two and 12, since the range of outcomes is smaller. Furthermore, risk is variable but not uncertain, all the players are rational and have all the available information all of the time.

When a gambler throws a pair of dice the result vary, but they aren't uncertain. The gambler knows the total will be between 2 and 12. The person rolling two dice knows with certainty he won't roll a 16 or a 1. In reality, markets don't work within a finite range and everyone participating in the market doesn’t know everything or always act rationally.

Theory-based portfolios fail when the markets, unlike dice, don’t react within a known range of certainty. This is what happened during the recent financial crisis. The market didn’t act within the range predicted by the theory. It misbehaved. When the markets misbehave, the investments misbehave and when the investments misbehave the theory fails.

Investors need strategies based on practice, not on theories. In theory, if you drop a brick and a feather at the same time they will land at the same time, in practice they won’t.

The second problem is investor rely too much on plans not strategies. Plans describes what you are going to do, a strategy describes what you are going to do if the plan doesn't work. Strategies provide reactions when the observations changed or the assumptions prove wrong. A typical asset-allocation sold by nearly everyone in the investment industry will work if the markets act like they predict. But, what if they don't?

Many investors lost money on conservative asset-allocations during the financial crisis, because the plan was rigid, the assumptions were wrong and there was no strategy to implement when assumptions failed. In the end, the plans weren’t conservative at all. The most common strategy is to do nothing, wait it out, sit and take it.

Investors need a flexible portfolio strategy that is non-theoretical, non-mathematical and based on the real world. In the