If you know who Alvin Toffler is and the name of his book, raise your hand. (Hmmm, I don't see too many. Not surprising, since it's been more than 40 years since it hit the best-seller lists.)
It was called Future Shock, and the warnings Toffler presented in it struck home with a reading public that felt increasingly unable to successfully navigate the challenges of a changing America:
"Future shock is the disorientation that affects an individual when he is overwhelmed by change and even the prospect of change. It is the consequence of having to make too many decisions about too many new and unfamiliar problems in too short a time.… We are in collision with tomorrow. Future shock has arrived."
If that was true in 1970, how much more so today? The decisions you are required to make, especially about your finances, are coming at you at an ever faster and more confusing rate. The future has always been uncertain, but economic uncertainty seems to have risen to a higher, more ominous level. Given this, how should we best position our investments for 2013?
We're introducing a new strategy this month that can help (see the cover article for details). It's a stand-alone approach we call "dynamic asset allocation" (DAA). The strategy is a flexible one that places a premium on preservation of capital. We developed it to provide our members with a new tool specifically designed with the new realities facing the U.S. and global economies in mind.
In the SMI print edition, you'll note that we have redesigned what, for the past three years, has served as the Optional Inflation Hedges (OIH) page. The new design (page 12) provides a prominent place at the top for DAA. We did this because of the way DAA incorporates many of the virtues of our other Premium Strategies, but does so in an extremely effective fashion. Here's what I mean.
- As compared to Sector Rotation, similar returns but lower risk. Like Sector Rotation, DAA can deliver above-average long-term returns, but has done so in a much lower-risk fashion.
The table on the right compares the average 12-month results of SMI's various strategies (Premium Strategies indicated with an asterisk) with those of the market as represented by the Wilshire 5000. The period began with the collapse of the tech bubble and included the devastating 2007-2008 bear market (reflected by the worst 12-month results during the period). It also shows how volatile the various month-to-month returns were in relation to the market.
You'll note that whereas the returns from Sector Rotation were 73% more volatile than the market for the period, those of DAA were 42% less volatile (and the worst 12-month performance was relatively mild). Yet the average returns were similar.
- As compared to OIH, protection against inflation only when it's needed. The OIH recommendations were offered to provide investment vehicles that would do well in an inflationary environment. DAA does that as well, but does so in a more efficient way.
Look at it this way. The OIH funds are like an insurance policy to protect you against the higher consumer prices expected to result from the federal government's massive deficit-spending policies. A debased U.S. dollar, it is anticipated, will eventually lead to higher inflation. The problem is one of timing — no one knows when this will happen. Whereas the OIH funds have you prepared at all times, the DAA recommendations are designed to kick in when needed, not years before.
- As compared to the Bear Alert and All Clear indicators, more timely bear-market protection. These timing indicators serve as insurance of another kind, offering some protection against a costly bear market. As we have explained, however, they are somewhat slow to act. The Bear Alert, for example, requires at least a 15% decline from the previous high. The DAA approach has the potential to act much more quickly to reduce your stock allocation.
If you're interested in simplifying your investing life, consider this Dynamic Asset Allocation strategy. It offers significant inflation and bear-market protection coupled with superior long-term performance — that's a winning combination.