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INVESTMENT
PRINCIPLES
MEASURE AND CONTROL RISK
The
first principle we follow at Secure Retirement involves
risk control. The principle, simply stated, is that we want
our portfolios to withstand every possible difficult economic
time period without ever losing a penny more than you are
comfortable losing. Risk must be carefully and precisely
calculated in order to insure that you will never
suffer unacceptable losses. We believe this goal is achievable
for most people, if they have and follow a sound discipline.
This is a discipline based on the most respected, scientific
method of measuring and controlling risk.
Our
portfolios have less than half as much risk as the average
portfolio consisting of U.S. stocks and bonds. The precise
risk level of a portfolio is determined by the needs and
preferences of each investor. Those who are younger and
more aggressive may choose to take more risk, while those
who are older and retired usually prefer less risk.
How
are we able to reduce risk so much? We use three main approaches
to reducing risk:
1.
Sophisticated diversification, choosing assets that have
unusually low correlations with each other.
2.
Scientifically measure the risk in every asset, and select
those that are proven to be substantially less volatile.
The following chart shows an example of one of our stock
funds that has remarkably low risk scores. The top,
red line indicates how much money our fund (Hussman Strategic
Growth) earned from 2000-2005. The orange line shows how
much similar funds made, while the green line below it shows
how much a popular stock index, the S&P 500, earned
during the same time period. As the market plunged in 2001-2002,
our fund actually went up each of those years.
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Growth
of $10,000 |
11-30-05 |
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Fund:
Hussman Strategic Growth |
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Category:
Mid-Cap Blend |
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Index:
S&P 500 |
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3.
Avoid mistakes. Investor mistakes lead to more losses than
the markets themselves, and the average investor actually
earns far less than the markets. We have disciplines in
place to avoid these mistakes, and we follow those disciplines
carefully.
GET HIGHER RETURNS
Once
we have risk accounted for and controlled, our next principle
is to get the highest possible returns. This is accomplished
through selecting superior mutual funds, stocks and bonds.
Stock
Funds
When
selecting stock funds, we only put our money into the hands
of fund managers who follow a proven discipline. While each
manager has his or her own unique approach, all of the managers
we use strictly follow the rule to "buy low and sell
high." Following this rule, the stock-based funds we
use have soundly defeated the stock market indexes. One
has doubled the returns from the stock market for 40 years,
returning 21.9% a year from 1965 through 2004, and its stock
price only went down once during those 40 years. Buying
low and selling high works.
The
international stock funds we use have similar track records
of outstanding returns with low risk scores. The following
chart shows how much one of our international stock funds
(Oakmark Global I) outperformed its competitors in recent
years.
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Growth
of $10,000 |
11-30-05 |
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Fund:
Oakmark Global Ih |
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Category:
World Stock |
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Index:
MSCI EAFE NDTR_D |
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Fixed
Income Funds
When
using bond funds, we use fund managers who have a long history
of investing in the areas of the bond market that offer
the greatest earnings. We have a variety of special fixed
income funds designed for current economic circumstances.
Again, the funds we use have outperformed the bond market
indexes by a substantial margin.
Summary
We
have briefly discussed the investment principles that guide
our work at Secure Retirement. While we have been speaking
in general terms, all our portfolios are carefully customized
for each client, based upon their specific needs. The result
is a portfolio in which we have truly measured and controlled
the risk level. We then focus on getting you the highest
possible returns at that comfort level. The result is a
portfolio that can give you real financial peace of mind.
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