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The Strategy Difference :: Knowledge Center :: THE RETIREMENT SOURCE®
The Strategy Difference

Adapt or Fail. There is no single retirement strategy, investment or asset allocation that will serve you well in all economic situations.

It may sound extremely harsh, but those who choose to stick with a single-minded approach to investing often get blown away by the winds of change. An adapative financial strategy is necessary.

The Strategy Difference

For example, for many years simply buying and holding good blue-chip stocks was considered the road to success. Now, as we see what has a happened to the domestic automobile industry and several others, we realize the folly of inaction. Unfortunately many investors who had most of their money in a relatively few such stocks have been nearly wiped out.

While nearly all investment professionals agree that asset allocation is important, we have seen that merely following a computer-generated asset allocation may be ineffective under extreme circumstances. As an increasing number of investment managers converged on the same allocation strategy, the benefits of such an investment strategy were severely diminished. The herd mentality simply ruined its effectiveness.

Because we are now in a global economy, there are now more investment opportunities than there have ever been. There are also a greater number of sophisticated participants in the markets with different motivations and time horizons. This suggests that we may continue to see opportunities appear and disappear quickly as these professionals react to them.

The old adage of "buy low and sell high" is as valid today as it has ever been. Most investors, however, practically ignore the sell side and simply watch investments go up and then back down. Where's the profit?

The bottom line is that you can't expect to make a significant profit
in a highly competitive market by doing nothing. Adapt or Fail.

The Missing Ingredient – Strategy

The difference between success and failure is often the absence of one detail. Most professional investors and many individuals have a process. Some even have an Investment Policy Statement. Very few, however, have a clear understanding of strategy. The key to strategy is recognizing the fact that in financial markets' change is inevitable. While there have been many theories and programs developed to mechanically adjust portfolios to changing markets, I know of none that have avoided eventual catastrophe.

Strategic thinking involves consideration of many potential events and outcomes along with possible tactics to optimize results. This is a much broader and more subjective perspective than most investment plans utilize. At any point in time the economy or a single investment can do one of three things. It can go up, it can go down or it can stay the same. As simple as this sounds, when we add in magnitude and timing, it becomes quite complex.

Suppose the global economy skyrockets for an extended period of time. Do we just sit back and smile and wait for it to go back down? Or do we take advantage of the excess and take some profits? Likewise if the economy spirals into total collapse, do we simply crawl under the covers and hope for better days, or do we have a strategy to capitalize on the weakness? Do we rely on preparation or whimsy?

The essential difference between strategy and program is in not only anticipating change, but also in evaluating magnitude and probability. In other words, an adaptive strategy that changes with market conditions. For example the higher and more extended the climb, the greater the probability of a fall and the greater the potential magnitude of that fall. With investing we are seldom talking about certainties. We are nearly always talking about probabilities and payoffs.

A competent strategist will take into account as many potential happenings as practical even considering rare but potentially catastrophic events. He will then assign probabilities of occurrence to each along with likely payoffs. It is important to note that payoffs are two-sided. That means most occurrences could have both positive and negative consequences. The strategist will then take action in measured steps relative to the probability/payoff potential. Finally, the strategist will regularly update the probability grid and adjust tactics accordingly.

At THE RETIREMENT SOURCE® we take a strategic approach to all our work with a conscious effort to build in contingency plans to adapt to changing circumstances.

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