So Sunday is the big game. And so is Monday. Once the Super Bowl champion is crowned, investors and their financial advisors must return to the issue of recent market turmoil, U.S. stock prices near all-time highs and U.S. Treasury rates at all time lows and many other factors.

Human nature is to be emotional. Football is emotional too. A while back I observed that investors and their financial advisors occasionally commit a variety of investment management “penalties.” There is a certain perspective that all truly long-term investors must return to in times of financial uncertainty. There is more to wealth management than guessing whether you should be “in the market” or “out of the market.” And, simply saying “stay the course” when there may be serious issues in one’s portfolio is a recipe for more of the same.

So, here is our list of official National Football League penalties — as applied to investors. Don’t get penalized, think your way through today’s environment, or find a money management specialist who can.

Human nature

1. False starts– 5 yard penalty. It is human nature to be optimistic about the ability of the economy and the markets to eventually bounce back. We do believe things will get better, and then much better in time. However, making an investment in something simply because it is way down in price is, like hope itself, not a strategy. Economies, markets and human emotions recover in a “U-shaped” pattern, not a “V-shaped pattern.” That is, they go through several little bi-polar episodes before they return to sanity. Don’t fight that, expecting to “get even” quickly. Focus on keeping losses short-term in nature and shallow in magnitude, and be opportunistic instead of aggressive. There are many investment approaches to accomplish this, and eveyone needs to identify with one they are comfortable with. Still, those are words we live by at Sungarden.

2. (Buy-and-) Holding – 10 yard penalty. Just because your time horizon is long, doesn’t mean you can’t sell something. As you can tell by the first penalty covered here, there is a balancing act to investing, especially today – practice diligent risk management, but don’t just curl up in a shell and take no risk at all. If you do too much of the latter, you may get called for “Intentional grounding” (5 yards plus loss of down) of what otherwise could be a productive portfolio.

3. Delay of Game - 5 yard penalty. Going to cash or freezing up as an investor is fine if your current and forever goal is capital preservation to the exclusion of everything else, and inflation is not a concern to you. I congratulate those that timed their way into an all-cash portfolio in 2008. However, the risk of “sitting on the sidelines” for long periods of time is that you will forever be trying to pick your spots to “get back into the market.” That is a skill that is tough to master over and over, and for those with long-term investment objectives, it can be as much of a detriment as being too aggressive. We raise our cash position as a “weapon” and hedge our portfolios quite often; it’s the all-or-nothing philosophy we are warning against here.

4. Pass Interference – 15 yard penalty. We are calling this one on the mainstream media and the big, impersonal investment firms. In their supposed efforts to “help” investors, they continue to present a message that has become a cliché, but to the detriment of many, oversimplifies some general investment concepts. Examples of this oversimplified advice include the following. We have summarized the other side of this conventional wisdom here as well:

a. Buy low cost mutual funds – in tough markets, net return, not cost is what matters

b. Diversify your portfolio – yet many seemingly diversified portfolios are really not

c. Style purity – restricting a portfolio manager to specific market segments (small cap, international, etc.) can lead to the investment equivalent of a hamstring injury in football. That is, the manager’s abilities are restricted due to lack of mobility.

5. Clipping…bond coupons – 15 yard penalty. The credit crisis has changed the bond game, maybe for a long time. Gone are the days where one confidently built a “care free” laddered maturity portfolio of high-quality corporate or municipal bonds. The bond market will likely return to its “old reliable” status again at some point. For now, however, low CD yields, suspect rating agencies and the general fear of risk in the bond market is akin to relying on a slumping place-kicker to win a game with a long field goal into the wind. It may work out but you are not as comfortable about it as you used to be. That should cause the resourceful investor and advisor to look for different ways to manage the conservative part of an overall portfolio.

6. Offsides – 5 yard penalty. Investors may at times feel they have been on the “wrong side of the market.” The conclusion they reach is to try to own what they wish they had owned earlier. That approach should send yellow penalty flags flying! A solution we have found that may cut investment losses and emotions, thereby keeping more players in the game, is to incorporate the use of securities that simulate short positions (which benefit from prices of a group of stocks or bonds going down) alongside their traditional “long” positions (i.e. buying something and profiting if it goes up). This is a portfolio feature that matters less when we are “on offense” – such as a long bull market. However, simply adding the potential to use the short side of the market when conditions demand it can insulate your portfolio like those portable heaters the players use on the sidelines during December games in Green Bay.

7. Unsportsmanlike conduct – 15 yard penalty. Anyone in the investment business that provides advice not in the best interest of the client gets flagged on this one.

So, that’s “Investment Football.” While these “penalties” exist, as with football itself they are setbacks, not game-breakers. If you accumulate a lot of penalties it will make it tougher to win the

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