THE VIRTUS VIEW

Good afternoon to all.

This communication is intended to add value to your life by helping you separate the real news from the white noise, understand the critical economic events that you read about every day and outlining  alternative investments which might be advantageous to you in these times.  We send this weekly e-mail to both clients as well as individuals we hope become future clients.  Thus, to my valued clients, since we use many alternative investments in your portfolio currently, some of the e-mails might discuss assets that you already understand.  It never hurts to review your knowledge of those investments.

Please feel free to forward these e-mails to any friends you have who you believe will benefit from learning more about finances and investments.

As I mentioned in my last Virtus View, it is imperative that we have a strategy going forward in these tough times.  If you have been doing like I have, then you have been raising cash and waiting for an opportune time to invest.  Cash is the key in tough times like these, but we also can’t sit on cash or low paying income investments long due to the risk of inflation.  I know it appears the stock markets are going to fall forever.  If history has taught us anything, it is that the U.S. of America preserves even through the toughest times.  We will see better days.  We need a strategy of when and where to invest when the time is right.  I hope your take away from this Virtus View is that doing nothing and “waiting for stocks to rebound” could actually cost you even more.

I want to discuss, when the time is right which stock sectors you should purchase and how to look for the new leadership in the market. Historically, new leadership industries/sectors show themselves soon after a bear market ends and the leadership lasts for approximately two years.

As most know Technology was the leader of the bull market in the late 1990s; now with that being said, I’d like to refer to the S&P 500 from 2000 to 2002, as shown in Chart 1 below, to help illustrate my example.  If an investor had $500,000 in tech stocks (the NASDAQ in the red line) at the end of 1999 and didn’t sell (buy and hold), he would have had approximately $175,000 in value at the end of 2002 versus $300,000 if they held the S&P 500 (the blue line) over that same period.  Obviously, that is hindsight, which is 20/20.  The issue that compounds the losses is the strategy, which many took, to just wait until the tech stocks got back to their highs or even just recovered some of their losses.

Chart 1:

 

As I stated above, too many people chose to wait until the tech stocks got back to their highs or even just recovered some of their losses and ended up confused on what to do next that they actually did nothing; not unlike the same decisions we are seeing being made today.  So, now lets review Chart 2 which shows the market from 2003 to 2006 (the recovery bull market) to see how that decision would have impacted those who remained in tech stocks.

Chart 2:

 

Using our investor from above, who ended up with $175,000 at the end of 2002 and remained in tech stocks (blue line in Chart 2), he would have had approximately $265,000 at the end of 2006.  However, if he would have moved to the S&P 500 (red line in Chart 2) at the end of 2002, he would have had approximately $290,000.  Even more importantly, if the investor would have found the leadership in international over that same period, which is shown in Chart 3,  and invested in EFA (green line), he would have had $385,000 at the end of 2006; a difference of over $100,000, or 40%, more value than just doing nothing.

Chart 3:

 

As I said, on average, leadership lasts approximately 2 years.  From 2006 to 2008 commodities were the leading sector in the stock market.

There are two important points to make here.  First, we want to overweight into the leadership areas, but we do not want to overweight to the point we lose our overall diversification goals.  Second, there are some proven strategies, based on historical performance, to identify leadership.  I use a couple of these to help my clients.  As usual past performance does not guarantee future returns.  

To summarize, not opening your statements, letting someone talk you into doing nothing, sitting on cash or low interest vehicles too long or not having a sound strategy going forward could costs you thousands of dollars.  My strategy is to be patient with the cash I have raised for my clients due to selling into the rallies over the past 2 months, use my tools to identify the leadership going forward, and buy when the time is right.  We do not need to hit the exact bottom, nor is that a reasonable expectation.  We just need to be patient with our decisions and have a prudent strategy going forward.

Best Regards,

Brian Tillotson
Wealth Manager
 
Virtus Wealth Management
2435 E. Southlake Blvd
Suite 120
Southlake, TX 76092
817-717-3812
866-407-4320
Fax: 817-416-6585
www.virtuswealth.com
Securities and Advisory Services offered through VSR Financial Services, Inc. Member FINRA / SIPC
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