Simplification and Measurable Results

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At the beginning of the week, I sent out my first client letter for 2021. I stated and broke down the issues we are facing going into this year. The best way to sum it up is simply this: In our country, we are sitting at a defining point. This is not a Democratic or Republican matter. It comes down to the size of government and its effect on everyone's lives. If they give us money and provide for us, there are always strings attached. It is a transfer of power, and this is what most politicians crave.

Here is the question that we look at as we watch the government pump in trillions of dollars of aid. This is truly the big picture.

Will the government provide a “hand-up” and slowly allow the economy and the citizens of this country to learn to walk again on their own, or will this be a “hand-down” enabling the government to become bigger and bigger as it transfers more and more power to itself? That is the defining question.

Last year, we saw events in the market that investors have never seen before. The largest correction (not Bear Market) in modern time, if not ever, took place and then quickly recovered. When given the circumstances, the market should have by all accounts turned the cycle into a prolonged Bear Market. Unexpectantly, that didn't happen.

In 2020, we didn’t get the results we wanted. When this happens, you have to change and adapt. If I have learned one thing, the old schools of thought will not survive in this modern era volatile stock market. At the end of the day, it is my objective to thrive in all types of markets, getting the protection when needed and the growth of your accounts the other majority of the time.

Even if we were to have experienced the results wanted last year, we still must consider changes and adapt as we power forward. If you do not change with the market, you will become irrelevant, and the market is changing. The purpose of this letter is to re-introduce you to money management from my perspective. Beyond the objective of education, this also intends to show you the potential for 2021. So, here we go!

First, I need to address compliance to stay within the rules and regulations given to us by the State of Texas Securities Board. Please note at the end of the letter the disclaimers and guidance concerning growth and risk.

We start 2021 with two major themes - Simplicity and Measurable Results.

Simplicity – The Three Phases of the Money Management Program

At any given time, I will be positioning your money in 1 of 3 portfolio strategies based on your risk level:

  • Plan A – when the market is going up in a short or medium or long term, trending direction.

  • Plan B – when the market is going down in a short or medium or long term, trending direction.

  • Balanced – when the market is directionless, going back and forth with no defining direction.

These three strategies make up one big strategy that is designed to make money in all types of markets. The simplicity of it is that there are three directions the market can go. The market either goes up, down or is directionless. I am not trying to insult anyone's intelligence here. I am just keeping it realistic and straightforward.

I can change from one strategy to another by making a few trades – once again, simplicity.

Simplicity – The 4 levels of risk

For many different reasons, each of you has your own unique risk level. There are several ways to determine a person's risk level.

Risk Category 1 Safe Money

Risk Category 2 Conservative

Risk Category 3 Moderate

Risk Category 4 Growth

Simplicity – Indicators

A job hazard in the money management industry is an analysis by paralysis. There are 100's of technical indicators, signs, signals, and strategies that are employed. You can become overwhelmed, and you miss the forest for the trees.

Through many years of research, I have narrowed it down to 15 indicators to determine the changes between the three strategies – Plan A, Plan B, or balanced. There are 7 short-term indicators, 3 medium-term indicators, and 5 long-term indicators. Yes, I will still consider other indicators. However, they do not determine the decision-making process. They are used as confirmation.

Measurable Results

Interpreting investment results is an interesting phenomenon. Two people looking at the same results (either positive or negative) many times have different interpretations. That is just how we are wired. The key is to see results from other standpoints.

So, it would be best if you had a baseline. I call it target rate investing. Per your risk level, there should be a reasonable, average rate of return as the goal to obtain. If you stay within the average rate of return, then you are on target. It will also have reinforced that you are in the right risk category as to how comfortable you are in the process of staying within that baseline. Measuring results looks like this:

Strategy Average Target Growth Rate

Safe Money Strategy 3%-4.5%

Conservative Strategy 5% to 6%

Moderate Strategy 7% to 8%

Growth Strategy 9% to 10%

So, at any given time during the year, you can ask yourself this one question. Am I going to finish the year within my average target growth rate or better?

The beauty of this idea of target rate investing is the ability to back-test (go back in history) using investment software to see if the targets are obtainable. So, I will show you hypothetical growth rates for Plan A for 3 out of the 4 risk levels.

Plan B example

Finally, there is no better way to demonstrate a Plan B's ability than a back-tested result during the financial crisis.

This plan B was up 27.45% when the market was down -54.71%. I am going to go ahead and point out the obvious. The dates, 10/13/07 to 03/06/09, cherry-pick the top and the bottom pretty closely. So, this is the optimal return. However, you get the idea.

Please, if you have any questions at all, now is the time to ask. Here is looking towards a great 2021!

Keep the Faith


Information regarding the numbers in this client letter. Past performance does not guarantee future performance. All numbers presented in the form of return accounting were hypothetical. The performance numbers represented by Plan A and B were rebalanced one time a year with no management. The addition of management would either increase or decrease the results. Also, no fees were calculated with these returns. All reporting was calculated by Morningstar Software and is believed to be accurate. All strategies have risk and Prudent Money Financial Services (PMFS) is not implying that this strategy guarantees to mitigate that risk. The plan B reporting shows a favorable time frame from the top of a bear market to the bottom of a bear market. PMFS is not trying to imply that they are able to perfectly exit and re-enter favorable trades in a plan B strategy. Add your text here. Edit to add dynamic values like name, email, and more.

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