[caption id="attachment_26550" align="alignleft" width="108" caption="Chuck Root"][/caption]

What determines your success investing in the stock market?  Like any business, you need a plan.

Did your results this year exceed your plan?  As we begin a new year, it’s important to review our plan and adjust for our expectations of the new year.  If you don't have an Investment Policy Statement, you have nothing to compare for 2010.  Without a plan how do you know if you have done well?  What was the risk in your portfolio?  Looking at the monthly, quarterly or year-end results tells you nothing of the risk taken to get where you are.

Why a game plan?  Have you recognized yet that you're playing in a very professional game? There are some very savvy investors in the world with the sole purpose of taking your money.  A professional sports team would not go on the field without a game plan.  Neither should you.

A game plan should include understanding what type of market we are currently in and when that market type changes. You need a game plan for all types of markets. There are volatile bear, volatile bull, neutral bear and neutral bull, to name a few. With a flexible game plan you can potentially make money in all types of markets. If your quasi game plan is to only be “long,” how do you know when to be out of the market or when to reduce risk?  There are hundreds of factors in the market that can influence action and change when prices move in opposite directions.

Some advisers may tell you that the “pie chart” is the basis for investing and that you can diversify your portfolio to reduce risk. That by investing in “non-correlated” asset classes you can be relatively safe.  In 2008, many asset classes and sectors showed a high degree of correlation when they all went down together.  Look at a chart comparing all asset classes in 2008. By the way, even with the gains in 2009, some are still as much 25 percent down from 2008.  We are in a structural bear market and have been since 2000, when the tech bubble burst.  If you look at the S&P 500, you will find that you would have very little gain over the 1998-2008 time period, if you invested only in that index.

How then can you adjust to how the market works?   There is a methodology that has been around since the early 1900s, that was conceived by independent thinkers who didn't follow the crowd.  The methodology is technical analysis, which lets the market supply and demand influence when you should buy, sell or hold a security.  There are several “flavors” of technical analysis, but the end goal is the same, know what the market is telling us. You can potentially make money even in bear markets with an effective strategy.

The operative word is strategy, since having a game plan is for each type of market, you will know when to be long, short or neutral (in cash).  In bear markets there can be periods with significant gains, sometimes as long as a year or 18 months.  Adjusting for market conditions can be a better strategy for capturing returns in such a market.

If you are like a lot of people, you hold significant amounts of fixed income assets, i.e. bonds.  Equity prices are expected to fluctuate, but did you know that bond prices fluctuate, too? When the interest rates go up, the bond values go down.  Sometime in the future, the Fed will be raising the interest rates, and your bond portfolio could be in trouble.

There is a strategy, as we mentioned, for each type of market.  If you take time to plan and work with an adviser who will put together an Investment Policy Statement incorporating technical analysis, you could experience less anxiety. As always there is no perfect plan in a chaotic market, but you could see less volatility and potentially greater returns in your portfolio by having an Investment Policy Statement.

What do you want to accomplish personally and for your career or business during 2011?  It’s important to focus all parts of your life with your investment plan. I would suggest meeting with your adviser to make sure you have an idea of how to proceed for 2011. Make sure your investment adviser provides comprehensive financial guidance, otherwise you're only getting part of what you need. Then meet each quarter and review where you are based on plan. Revising frequently, you can be better prepared than when the market takes a plunge with no planning.


Charles J. Root Jr., CFP, is a registered investment adviser with Double Eagle Financial in Santa Rosa, 707-576-1313, chuck@double-eaglefinancial.com. Securities offered through LPL Financial, member FINRA/SIPC. The above article is the author’s opinion and thinking and is not an offer to buy or sell securities.  Using an active investment management strategy may incur additional expenses and involve tax consequences. No strategy or plan can ensure profits or guarantee against losses. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.