PERSONAL FINANCF FOR THE CEO
September 1 1989 by Stuart F. Barnes
Not long ago, I conducted an informal survey of a number of my CEO clients to determine the types of investments they were interested in making. I was surprised at the uniformity of their requirements. See if you agree with them.
Interestingly, it seems that CEOs insist on conservative, low-risk investments, especially for their serious investment funds, or if serving as fiduciary.
They want better than-CD returns, but only if they can be attained safely. Further, the investment must be timely-that is, responsive to rapid change-and low cost with regards to commissions, fees and charges. Finally, assets must be accessible on short notice-not locked in for years.
If the investor insists on all these requirements, the field of qualifying investments is considerably narrowed. Many investors have failed to locate even one vehicle that consistently succeeds.
Although admittedly a very tall order, I submit that the above requirements can be met. To do so requires an understanding of economic cycles, since all investment areas vary in productiveness as economic cycles change.
No single investment is good all the time. Even U.S. Treasury securities and CDs prove disappointing over the long term, since a penalty is paid when one looks for maximum safety. When inflation rates and taxes are deducted from interest earnings (as they must be, or you fool yourself as to real returns), one finds he has been “treading water,” or even slowly sinking. He certainly is not enjoying growth of invested assets.
If it is true that no investment is good all the time, then the corollary must be accepted: All investments are good once in a while. Each enjoys its day in the sun.
How to identify the currently productive investment area is the whole secret. I believe this is best accomplished by observing where we are in the economic cycle and choosing the investment area that is favored-given a boost-by that phase of the cycle.
An advantage of following this policy is that one is automatically out of the investment areas not favored, for just as the cycle’s phase can favor one investment, it can disfavor or suppress another. If, for example, you insist on purchasing bonds when interest rates are trending up, you are in a disfavored investment. It is swimming upstream. It will take many months, or years, to undo the damage done.
Anticipating your objection: Yes, it is true that economic cycles are occasionally modified. They are smoothed or lengthened by various events such as more intelligent intervention by the Fed, increased or decreased taxes, expanding or contracting deficits, and war or lack of war. But cycles never disappear altogether. Peaks and troughs will vary in intensity. But one always follows the other. Passage from one phase to another is often blurred. It can speed up or slow down, and at times even appear to retrogress. The cycle is being constantly modified.
But it is enough to know approximately where we are in the cycle to benefit from favored investment areas, and avoid areas doomed to fail because they are bucking the cycle.
The accompanying illustration, “The Economic Cycle and the CEO Investor,” shows in an overly simplified form what we are discussing. In my experience, if my clients had fully understood from the beginning of their investment activities the importance of this illustration, they would have improved considerably their overall returns.
For example, if interest rates are trending down, favored investment areas include bonds, zero coupon bonds, and utilities. If the U.S. dollar is declining, try foreign currencies or international funds. While growth is accelerating at home,
One great advantage of following this method is that no forecasting is needed. No gurus are required. No crystal balls. This alone makes the system worth using, since no one I know (especially not me!) is able to predict future economic events with any consistency. All that is required is to identify what phase of the economic cycle we are currently in, and then move one’s funds to investment areas favored by that phase of the cycle. Nothing else.
The concept may be attractive to you, but how complex is the implementation? It really is not a full-time occupation keeping up with all this. I have three suggestions that will help.
First, use no-load mutual funds to participate in the different investment areas. They enjoy built-in diversification, professional management, exceptionally low cost, and the flexibility to move instantly from bonds to stocks, etc., via-telephone exchange. I have named my current favorites for your consideration (see box, “Currently Recommended No-Load Mutual Funds”).
Second, a little reading will help clear up areas of uncertainty. I have found one book of exceptional value: New Strategies for Mutual Fund Investing by Donald D. Rugg (Dow Jones-Irwin, 1988). Mutual funds have come a long way in the last 10 years. Don’t allow their previous tarnished image to keep you from enjoying their many current benefits.
Third, hire an investment advisor that implements this thinking. The maximum total cost including commissions, all fees and other charges will be 0.5 percent to 2 percent per year, depending on the size of your account. But this method returns better than 20 percent per year compounded, net to the investor. And it adds to the safety of your investments. In this way, you are relieved of all investment decisions, and can use your time and mental energy for other pursuits.
Why have more people not recognized the benefit of tracking cycles and investing accordingly? Many do, of course, and quite successfully. But perhaps most are simply intimidated by the complexities of the investment world, numbed by numerous investing disappointments. They feel that anything as complex as the world’s economies and its related investments cannot possibly be reduced to a single, simple concept.
I contend that it can. I have found it far more comfortable and profitable to follow this method than to “buy, hold and hope,” and so have my clients. It is similar to being able to switch bets in a horse race as the race progresses. Not hard to finish out front that way!
Where are we right now? I perceive the current cycle characteristics to be these: Interest rates in decline, inflation fears receding, money supply and credit easing. Therefore, I am currently recommending new accounts to apportion funds in this manner: 30 percent in zero coupon bond funds, 30 percent in U.S. Treasury bond funds, and 40 percent in money market funds.
During the month of June alone, zero coupon bond funds produced a total return of 8 percent. That illustrates what a “favored” investment can do.
Just a few final thoughts. If you are wondering whether this strategy would have had your funds safely on the sidelines during the October 1987 market drop, I can assure you that it would have. Any investment advisor closely following the concepts presented in this article would have had all funds removed from stock and bond markets three weeks ahead of that distressing event. And although it is neither legal nor reasonable to affirm that any future market calamity would thus be avoided, at least prior performance should give hope that such would be the case.
Try to make the momentum and trends work for you. Avoid investments that go against current cycles. “Buy and hold” seldom works. If your work load or other interests preclude your taking on this additional chore, hire a competent advisor that uses this thinking. Just as any worthwhile professionals earn for you much more than you pay them in fees (CPAs, tax attorneys, etc.), so it is in this area of investments. Good brains can be hired at acceptable cost.
True, economic cycles have been modified in recent years. The previous boombust-boom extremes have been flattened out, periods of growth appear longer, periods of contraction have shortened. But we still have cycles with identifiable phases. And that is all that is needed for this concept to work.
Stuart F. Barnes is president of Siebar Advisors, Inc. of