CPM Investing LLC - Investment Publications
The goal of Focused 15 Investing is to help you more than double your retirement account over a ten- to fifteen-year period compared to what you otherwise would have obtained using your current investment approach. In this article, you’ll learn what an asset class is and why we focus on avoiding losses in the stock market.
In our investment approach, we focus on asset class rotation. Asset classes are types of securities. One asset class is stocks, and these are especially important to people who are saving for retirement. Stocks tend to have high long-term returns, but, unfortunately, they can have large temporary losses.
Another important asset class is bonds. Bonds have lower long-term returns, but they have smaller short-term losses. These two asset classes are the most important in most retirement accounts.
Cash is a third type of asset class. It has minimal long-term returns and minimal short-term losses. It seems safe, but the effect of inflation meaningfully reduces the value of cash over time, which makes it less attractive as a long-term investment compared to stocks and bonds. We rotate our accounts among these three asset classes. In one market environment, we might emphasize stocks; in another market environment, we might emphasize bonds; and in another, we might emphasize cash. In this way, we rotate the money in our retirement accounts to stocks, bonds, and cash depending on market conditions in order to avoid losses and to gain high long-term returns.
More specifically, we want to avoid losses in the stock market, and the table below shows why. As you can see, down the right side of this chart are some big losses: 89%, 47%, 40%, and so forth. These are the largest losses that have taken place over the last one hundred years.
One of these periods of great losses is in recent memory: in 2007 to 2009, there was a loss of nearly 50%. These losses did not occur over a week or a month but over a long period of time.
Similarly, back in the 1930s, it took almost three years to go from the peak in prices to the lowest point. The goal is to avoid these kinds of long-term protracted losses. The time required to get back to where the peak was can be very long as well, as shown in the table above. When it comes to your retirement account, you want to avoid the losses that have long declines and long recoveries.
The recent decline associate with the COVID-19 pandemic and the 1987 crash are similar. These are not pictured in the chart, as they are of a different nature. Both had large declines that took place over a matter of weeks. They are painful, but they are not the most common type of decline. While we have good success avoiding the type of declines shown in the table above, the ones that take place abruptly are more difficult to avoid. In these cases, we depend on the ability of Focused 15 Investing model portfolios to quickly recover from the losses that do occur.
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