Asset Rotation

The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance

Matthew P. Erickson

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118779194
• eBook ISBN: 9781118779200
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

An all-weather, tactical approach to asset management utilizing Exchange Traded Funds (ETFs)

In Asset Rotation, portfolio management pioneer Matthew P. Erickson demonstrates a time-tested approach to asset management that has worked throughout the history of capital markets, in good times and bad. Providing investors with strong participation in rising markets, but more importantly with a discipline to reduce participation in prolonged declines. Over time this revolutionary approach has yielded superior returns, with significantly reduced levels of risk; providing the engine for true, long-term sustainable growth.

The investment world as we know it has changed, and the paradigm has shifted. What has worked in the past may no longer work in the future. No longer may bonds be regarded as a safe haven asset class, as for the first time in generations, investors in fixed income face losses as interest rates rise from historical all-time lows. For those adhering to a conventional Modern Portfolio Theory based investment approach to asset management, what was once regarded as safe and stable, may very well soon become our greatest impediment.

Asset Rotation provides investors with a practical solution for today's real world problems. This tactical approach to asset management provides us with concrete proof that there is indeed a better way.

We are standing on the precipice of an Investment Renaissance. What was previously impossible, is now possible. Find out how.

• Presents an easy-to-understand price momentum-based approach to investing
• Illustrates the benefits of asset rotation
• Offers a systematic approach for securing a sound financial future
• Provides further insights as to how to customize your own asset rotation portfolio

Matthew Erickson gives investors a hands-on resource for how to navigate an increasingly difficult investment landscape, by providing them with keen insights into the most rapidly growing segment of the investment markets.

CHAPTER 1
TAKING THE 30,000-FOOT VIEW
Where We Are Today

Before we can begin to dissect all of the nuances as to why what has worked in the past may no longer work in the future, we must first start with a “30,000-foot view,” putting into perspective both the realities of the individual investor’s disposition and historical performance, as well as our current economic landscape. Once we have a general understanding of the challenges at hand, we can examine these issues more intimately and ultimately provide practical solutions as to how investors can more efficiently navigate this tumultuous environment (while inherently reducing the impact of outsized risks).

THE INDIVIDUAL INVESTOR

It has often been said that when you are in the thick of things, you simply cannot “see the forest for the trees.” Because of all of the obstacles that surround us (some real, others imagined), our vision is impaired and it is easy for even the most astute observer to become overwhelmed; so much so that they can no longer see the path which lies ahead, nor the bigger picture at hand.

If we apply this analogy to the investment markets and the daily influx of market-moving headlines, prognostications, and so on, it is easy to see how one might get lost in the myriad of directional noise. After all, CNBC, Bloomberg, and the like need to drive ratings, and there is nothing better than sensationalizing a trivial nonevent for this purpose. For that matter, we must admit we find the circus to be mildly entertaining. In one segment, you’ll hear from some expert why the market is going up, and in the next you will hear from another why it is going down. It pains us to think how many people get their investment ideas (particularly stocks) from watching this drama play out.

In the past, we have had the good fortune of sitting in on a handful of small group presentations by renowned economist Dr. Bob Froehlich. While we may not always agree with his message, we can certainly appreciate his enthusiasm and the wildly compelling arguments he makes to support his well-articulated views. Reiterating our previous point, the one thing we heard Dr. Bob say that has stuck with us over the years was, “If you see someone on TV telling you to buy a stock, it is because they own it and they need to get out at a higher price.”

The reality is that we live in a world that is dialed into the investment markets 24/7, in the United States and abroad. Whether through TV, radio, the Internet, or a litany of industry-related publications, investors today are flooded with a plethora of information. They are inundated with commentary from very smart people weaving well-crafted messages to convey their views. These experts are backed by industry-related pedigree, impressive educational backgrounds, and fancy initials after their name—all of which leads us to believe they are qualified to know what is coming next, whether for the state of an individual company or the economy at large. But despite all of these superficial pearls of wisdom, more often than not they are wrong. It’s not their fault. It is by the conventions we have endeared ourselves to that they are obliged. They are simply purveyors of an ego-driven industry in which individuals believe they can know more than the markets.

OCKHAM’S RAZOR

“Pluralitas non est ponenda sine necessitate” (“Entities should not be multiplied unnecessarily”)

William of Ockham, a fourteenth-century Franciscan monk, born in the small village of Ockham in Surrey, England

While many of us may not be familiar with the name, historians today regard William as one of the central figures of Renaissance thought, at the epicenter of the major intellectual and political controversies of his time. William is most highly regarded for his contributions to the principles of parsimony. This later came to be known in academic circles as “Ockham’s Razor” and centuries later continues to provide one of life’s most important guiding principles.

Ockham’s Razor essentially states that if one can explain a phenomenon without making unnecessary assumptions, then there is no ground for assuming it, that one should always opt for an explanation in terms of the fewest possible causes, factors, or variables. Today, we know this as the KISS principle—Keep It Simple, Stupid.

When you look out into the landscape of the financial markets, you can see that we certainly don’t do a very good job of this. Click on CNBC, pick up your Wall Street Journal, or turn on your Bloomberg radio, and this much should be blatantly obvious. There is a whole army of financial wizards trying to decipher the behavior of the investment markets and sharing with us their opinion of what’s to come. The irony is that seemingly more often than not, their visions fail to come to fruition. And yet we as investors are encouraged to base our investment decisions on their collective wisdom.

Perhaps this is where William of Ockham comes in. Rather than attempt to predict the future price of a stock or the future state of our economy, encompassing a mountain of data and incalculable variables, rather than attempt the impossible by looking forward, wouldn’t it just be easier to “look ...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Acknowledgments
• Prologue: David & Goliath
• Preface: We Stand on the Precipice of an Investment Renaissance
• Chapter 1: Taking the 30,000-Foot View
• Chapter 2: When the Paradigm Shifts
• Chapter 3: Shooting Stars
• Chapter 4: Beyond the Stars
• Chapter 5: The Landscape Has Changed
• Chapter 6: Challenging Convention
• Chapter 7: Building a Better Mousetrap
• Chapter 8: Choose Your Own Adventure
• Chapter 9: The Anatomy of Change
• Chapter 10: Letting Go of Your Crutch
• Chapter 11: The Road Ahead
• About the Author
• Index
• End User License Agreement