fbpx
U

Act Rich and Protect Yourself from a Down Market

August 10, 2007

Important Money-Guy.com news!!! Due to the success of our podcast I have been offered a radio show on Atlanta’s Business Radio station AM 1160 (Follow the attached link to check out the station) I will be on air Monday’s 11AM to Noon starting in September.  Since so many of you are math minded you have probably already figured out that this also means that you will get twice as much of me since I currently only do shows every other week. The Money-Guy.com podcast format will change slightly since my shows will now be broadcast on both iTunes as well as AM 1160, but I think that this is a tremendous opportunity and I owe you the listeners and subscribers a big thank you!  On another matter I am also in discussion with the Fox Business Network to be a contributor.  I am not sure if anything will come of it, but it is pretty cool that this hobby that I started because I love technology and feel that most Americans are not getting good advice has led me to a radio show and potentially exposure through a television network. THANKS AGAIN FOR YOUR SUPPORT!!!

The financial markets have a been a roller coaster for the last few weeks, and by all indications this could continue for quite sometime. It is times like this you need to make sure that you have not been too ambitious with your level of risk, and also an opportunity to make sure that your idea of diversification extends beyond traditional stocks, bonds, and cash holdings. Diversification is the element of your portfolio that is going to let you consistently take 2/3 to 3/4 of the upside profits of a rising market, but limit your loses to less than 50% of the overall market.

On today’s show I am going to be discussing the benefits of using Long/Short Funds.  As many of you are aware I am a partner at a Wealth Management Firm on the south-side of Atlanta.  We also have an office in Augusta, Georgia and it is run by my partner Bill Cleveland.  I have always said that Bill is the smart partner and I am the loud partner.  Bill has an article in the July 20, 2007 issue of Medical Economics titled, “Make Money with Long/Short funds” and the timing of this article could not be any better (Follow the attached link to see the full article). After listening to our show and then reading Bill’s article you are going to see that this asset class could be just what your portfolio needs to weather this type of uncertain market.

So what is a “Long/Short” Mutual Fund – A long/short fund takes advantage of a technique that many hedge funds use that allows them to make money in both a rising and falling market. Long/short fund managers divide their funds’ assets into two types of positions (long and short holdings).

Long positions – meaning they buy stocks expecting that they will rise in value and can be sold at some point in the future at a gain (this is the traditional form of investing that most investors are use to… buy value priced stocks with the anticipation of selling for a gain).

Short positions.  This technique allows managers to make a profit by anticipating a stock price decline, and then “selling short.” (The short seller borrows shares of a stock whose price may drop and immediately sells them, betting that they will be able to replace the borrowed shares with new ones bought at a lower price and pocket the gain from the decline).

This type of money management is complex, but it can provide downside protection if the market hits a down period.  Consider the following examples:

Hussman Strategic Growth Fund made 14% in 2002 when the S&P 500 dropped 22%
Merger Fund returned 18% in 2000, a year the S&P 500 dropped over 9%

Using these funds provides you with a similar type of diversification that the wealthiest families are using in their private hedge funds without having to meet accredited investor status (fancy way of saying that you have a high net-worth or at least earn a large annual income).

When I talk about this asset class I refer to them as “Absolute Return” funds because as mentioned earlier they look to make money no matter what the stock market is doing.  This is different from traditional mutual funds and their stated goal of “relative” performance (meaning they are just trying to beat an index). A good example that Bill provides in his article provides that if the S&P 500 was down 15%, and a traditional actively managed mutual fund dropped just 10%, on a relative basis, that fund beat the market by 5%.  However, on an absolute basis, the fund was still down 10%.

You are probably thinking to yourself that all of this is great, but what about the risk of these funds?  Over the last 10 years Long/Short funds have returned 7.3% with only slightly higher risk than a 10-year Treasury note, which now yields less than 5%.

Is there a downside or weakness to this type of investment? The short answer is yes.  When the broad stock market is having a big run, long/short mutual funds will not share in as much of the gains.  In 2003, the S&P 500 make nearly 29% while long/short fund overall gained just over 9%. For this very reason I would use this asset class for 10% to 20% of your portfolio.

So what should you look for in a good Long/Short Fund?
* Expense ratio that is lower then the group’s average 2.2% average.
* Fund’s annual returns should be in the black, or minimally in the red, even in steeply down market years
* Since these funds should make money even when the market’s dipping they should have a low “correlation” with the broad stock market.

My partner Bill lists three funds that meet this search criteria.  They are:
* The Gateway Fund (click here for their site and research)
* Hussman Strategic Growth Fund (click here for their site and research)
* Merger Fund (no website is available) 800-343-8959

I also have a fund that has a horrible MorningStar® Rating (their performance has struggled through the recent good market), but I am going to let you guys know about it because it was my darling fund back in 2000. It is also an Atlanta based Fund company.
* Caldwell & Orkin Market Opportunity (click here for their site and research)

The 3rd Quarter’s Wealth Report covers the following topics:
** The Dollar Is Weak and It has Affected US Investors
** Avoiding Mistakes on IRA Rollovers
** Update on College Savings Plans
** Eight Ways to Save on Life Insurance
** Why You Should Avoid direct Debits

 

FILED UNDER: Podcasts
TAGGED WITH:

Most Recent Episodes

Financial Hacks and Habits of the Top 1% (By Age)

ho wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% - and the habits and hacks those in the top 1% used to get there.   In this...

How to Win With Money in 2023!

Financial resolutions are always near the top of the list of Americans’ most popular New Year’s resolutions. Whether you want to save and invest more, pay off debt, or have other financial goals, we will give you the tools you need to win with money in 2023.   In this...

TikToks That INFURIATE Financial Advisors

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

5 Levels of Wealth AND How to Achieve Them! (2023 Edition)

We believe there are five distinct levels of wealth, but they aren’t solely dependent on income or net worth. We’ll walk you through each of the five levels - including how to know where you are at, how to advance to the next level, and signs you are doing it right.  ...

Average Net Worth By Age in 2023!

It’s time for one of our most anticipated shows of the year: our annual Net Worth By Age show! In this year’s edition, we’ll shared updated numbers and data for 2023 and discuss the most important things for you to focus on in each decade.   In this episode, you'll...

Win Financially During a Recession! (Everything You Need to Know)

The bear market we've experienced in 2022 has been longer than many in recent memory - and some are concerned that the economy may soon enter into a recession. Here's everything you need to know to stay on-track and win financially during a recession!   In this...

The Fed Just BROKE the Car Market! (What You Need to Know)

Car prices have been on a rollercoaster ride the last few years, and it looks like they might finally be coming down. In this episode, we’ll discuss what you need to know about the current car market, pitfalls of buying a car, and how to do it the right way.   In this...

Top 4 Money Mistakes People Make During the Holidays!

There’s a reason why financial resolutions are always near the top of the list in January - many Americans spend the holiday season making financial mistakes. In this episode, we’ll discuss the top money mistakes people make during the holidays and how to avoid them....

Financial Advisors Share What They WISH They Knew About Money Earlier!

Have you ever felt like if you just knew this one thing about money earlier your finances would be in a better spot? In this episode, we’ll share the five biggest things we wish we knew about money earlier!   In this episode, you'll learn: What we wish we knew earlier...