Author and investing professor Leland Hevner recently noticed a trend among his college-level investing students: Many are retirees or nearing retirement age and have used financial advisers for most of their investing life. They show up in his classroom lost and bewildered, after suffering significant losses of the savings they planned to live on after retirement. Now they need to learn a new strategy.
“To be successful, [I knew] they needed to decrease their dependency on third-party advisers and learn how to make informed and effective investing decisions on their own,” Hevner says. “For this to occur, the field of investing needed to be made much simpler than it currently is. In addition, while factors that affect equity prices recently have changed significantly, the investing tools and methods that we have been taught to use for years have not changed, and [therefore] they no longer work.”
Hevner believes that the traditional “buy and hold” method doesn’t work in a stock market as volatile as today’s, so he designed an investing system to take out the guesswork from the market and minimize losses. He calls it the “Perfect Portfolio Method,” or PPM, and says it can work for all investors — regardless of age or investing experience.
“I wrote The Perfect Portfolio to provide a simple, powerful and radically different approach to investing that can be used by all individuals, regardless of experience level, to realize returns that can significantly beat market averages,” Hevner says. “This approach is designed to work in the new market conditions we are currently experiencing and that we will experience in the future.”
The PPM and what makes it different
The PPM uses nine asset classes instead of the traditional three (cash, stocks and bonds). Hevner recommends including cash, U.S. stocks, foreign stocks, bonds, gold, energy, agricultureal commodities, real estate and emerging markets. He chose these classes based on their ability to generate a significant return and because the group is diverse.
Here’s the first key of the PPM: In order to create a portfolio containing so many classes, Hevner recommends using a single exchange traded fund (ETF) to represent each class except cash.
“Therefore, the Perfect Portfolio need only ever have nine investments, and these need never change,” Hevner says. “This dramatically simplifies the entire investing process, as there is no longer a need to go through the agony of searching through and analyzing thousands of stocks and funds. An example would be using SPY (an ETF that tracks the S&P 500 index) as the stock market building block.”
The next key to the PPM method is to adopt a buy-and-sell approach, using simple chart indicators and employing trailing stops to minimize losses. The investor then owns each of the eight ETFs — along with a cash fund — only when they are in an uptrend and sells at the beginning of a downtrend. At any one time, the investor will have a diverse portfolio that meets the investing style, goals, market conditions and risk tolerance of the individual.
“The use of ETFs also completely eliminates company risk from the portfolio, as each owns dozens or hundreds of individual stocks or bonds,” Hevner says. “The PPM is not an automated, black-box trading system. The PPM is a methodology that enables people to make profitable investing decisions on their own based on simple analysis of nine asset building blocks.”
The PPM also recommends investing in inverse ETFs that profit as the market is going down and moving in and out of asset classes as the market changes. An investor can sign up to receive email alerts when his investments move past or below a number the investor feels comfortable with, so he can buy or sell accordingly.
Putting the PPM to the test in 2009
Hevner is a testimony to his own system. His total return midway through 2009 stood at 20 percent, and he held ETFs in three of the nine asset classes.
“My major positions, ETFs, returns so far and trading actions are as follows:
Stocks: SPY – UP 20%.
Entered in March, still holding
Gold: GLD – UP 15%.
Entered in January, sold in March.
Entered again in May, sold in June.
Emerging Markets: EEM – UP 33%.
Entered in March, sold in June.
“In total, I made five trades at $9 each and received 10 ‘alert emails,’ “ Hevner says.
When does Hevner decide to buy or sell?
“I personally use a simple crossing of the ETF price above its 22-day moving average to determine an entry point,” he says. “When I buy, at the same time I enter an automated trailing stop price at approximately 8 percent below the purchase price to stop losses. Note that a trailing stop follows the ETF price up but never goes down. Thus, if I buy GLD at $90 I set a trailing stop at 8 percent below or approximately $83. If GLD goes up to $95 the stop follows it up to $88, maintaining the 8 percent stop-loss gap. But if the price of GLD then goes down to $92, the trailing stop price does not go down with it, it remains at $88. A trailing stop goes up with the price but not down, so it is an amazing tool to stop losses and let profits run.”
Trying the PPM yourself
If you are not already actively managing your own portfolio but have left it in the hands of financial advisers, take a portion of it, say five to 10 percent, and give the PPM a shot, Hevner recommends.
“The tools exist on the Web that can enable any person to become a successful independent investor,” Hevner says. “Incredible tools are available on the Web for analyzing markets, viewing and analyzing charts, placing orders with automated trailing stops and setting email alerts for taking profits. There also exist ‘watch lists’ that will send you automatic emails when one of the PPM asset classes is beginning to experience an uptrend and deserves your attention.”
The advantage of actively managing your own portfolio and seeing it grow means that earnings continue throughout retirement years. A person’s earning power doesn’t end when their career ends; it simply transfers to investing.
“Some will want to use the PPM to invest and earn money as a hobby; others will want to become more involved and invest to generate a major source of income,” Hevner says. “The PPM allows for all levels of involvement and thus income. The higher the involvement level an individual is willing to commit to, the higher level of income they can reasonably expect.”
Leland B. Hevner is founder and president of the National Association of Online Investors and author of 12 investing publications, including The Perfect Portfolio (Wiley, 2009). He teaches investing at the college level. Visit perfectportfoliobook.com or email Hevner at LHevner@naoi.org. (Please note that the author does not dispense specific investing recommendations.)