The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

226 Pages·2012·1.93 MB·English

by  Timothy J. McIntosh

(continued fr om front flap) mcINTosh $49.95 USA / $59.95 CAN
it’s time to break with outdated invest- T
h
ing concepts. Bringing together decades I
e nvesting in stocks and bonds can yield
of research and theory to produce one
S rewarding returns, but only if you have
unique new investment strategy, The Sector Praise for
the time to ride out the ups and downs.
e
Strategist synthesizes a multitude of eco-
SecTor STraTegiST Most people don’t. In The Sector Strategist:
nomic and market scenarios to produce a The c
Using New Asset Allocation Techniques to
winning model, giving you everything you
T Reduce Risk and Improve Investment Returns
The
need to improve your returns and protect
o Timothy McIntosh presents a revolutionary
“In his book The Sector Strategist, Timothy McIntosh makes a
your assets.
new investment philosophy that redefines
compelling case for why investors should carefully review valuation
r sector investing to guide you to consistently
TimOTHy J. mcinTOSH is the Chief and dividend yield before committing to an investment strategy. above-average results.
Investment Officer of Strategic Investment His analysis should help investors who heed his advice avoid the S SecTor
Partners, LLC and its affiliate, SIPCO. hit-or-miss emotional decisions that plague many who focus T Marking a radical break from tradition,
He has been featured in the Wall Street this book challenges inaccurate investment
excessively on short-term stories about investments to get r
Journal, the New York Times, USA Today, assumptions—like the belief that inter-
on a firmer path for long-term success in the market.” a
Investment Advisor, Fortune, Barron’s, and national stocks provide diversification—
the St. Petersburg Times. McIntosh has been T that many finance “experts” follow blindly.
—James P. O’Shaughnessy, Chairman and CEO of O’Shaughnessy
named one of the top investment advi- e STraTegiST Teaching you the basic tools you need
Asset Management, LLC
sors for doctors in the country by Medical to perform fundamental analysis on any
g
Economics magazine in 2004, 2006, 2008, prospective sector investment, the book
2010, and 2011. “Tim McIntosh effectively debunks those static, buy-and-hold strate- i explores the history of the stock and bond
S
markets over the last century, outlining
gies. He not only presents a compelling argument for smart sector
T
which sectors are the least volatile and have
diversification, but also delivers detailed blueprints for assembling a
performed most strongly over the years.
R U
portfolio that fits your risk tolerance.” ed sin Using New Asset Allocation
uc g Highlighting five sectors—healthcare,
—Jeff Harrington, business journalist for the Tampa Bay Times e Ris New Techniques to Reduce Risk and energy, consumer staples, technology, and
k A finance—that McIntosh sees as most prom-
a s
“Timothy McIntosh’s The Sector Strategist is a clear, common-sense nd se Improve Investment Returns ising, the book looks at the future prospects,
guide to constructing a sturdy portfolio. And, while you’ll learn all Im t A major players, and real investments made in
p llo each to give you a clear view of the oppor-
you need about stock sectors, you’ll also get a first-rate education on ro c
v a tunities they present. A truly expansive
e t
analyzing and selecting stocks.” In ion resource, the book also looks at alternative
ve Te investment opportunities—including REITs
—John Waggoner, Personal Finance Columnist, USA Today stm ch and gold—and much more, all backed
n
en iq up by model portfolios that illustrate the
Jacket Images: © iStockphoto t u
R e profits to be made using this unorthodox
e s
t t new methodology.
u o
r
n
s
If you want to be sure that your money
will survive and thrive in the years ahead,
TImoThy J. m I NTosh
c
(continued on back flap)
PMS 266 BLACK GLOSSY
FTOC 01/18/2012 13:34:34 Page6
FFIRS 01/27/2012 13:40:47 Page1
The Sector Strategist
FFIRS 01/27/2012 13:40:47 Page2
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The Sector Strategist
Using New Asset Allocation
Techniques to Reduce Risk and
Improve Investment Returns
TIMOTHY J. M INTOSH
C
JohnWiley&Sons,Inc.
FFIRS 01/27/2012 13:40:47 Page4
Copyright#2012byTimothyJ.McIntosh.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
McIntosh,TimothyJ.
Thesectorstrategist:usingnewassetallocationtechniquestoreduceriskand
improveinvestmentreturns/TimothyJ.McIntosh.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN978-1-118-17190-5(cloth);ISBN978-1-118-22682-7(ebk);
ISBN978-1-118-23979-7(ebk);ISBN978-1-118-26452-2(ebk)
1. Portfoliomanagement. 2. Investments. I. Title.
HG4529.5.M3862012
332.6–dc23
2011050801
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
FTOC 01/18/2012 13:34:34 Page5
Contents
Introduction 1
CHAPTER1 TheReturnDilemma 5
CHAPTER2 SectorAllocations 29
CHAPTER3 TheHealthCareSector 51
CHAPTER4 TheEnergySector 73
CHAPTER5 TheConsumerStaplesSector 89
CHAPTER6 TheTechnologySector 107
CHAPTER7 TheFinancialSector 125
CHAPTER8 Bonds,REITs,andCommodities 145
CHAPTER9 FundamentalAnalysis 163
CHAPTER10 TheSelectionProcess 185
CHAPTER11 TheRightAllocation 197
Endnotes 209
AbouttheAuthor 213
Index 215
v
FTOC 01/18/2012 13:34:34 Page6
FCINTRO 01/19/2012 17:4:46 Page1
Introduction
The stock and bond markets have offered investors reward-
ing returns for the past 100 years, or what is considered the
‘‘long run’’. However, the long run may not be ‘‘long enough’’
for many investors. An individual investor has a finite period to
growinvestmentassets,normallystartingfromage35to65.De-
pending on the historical period the investor lives in, the ulti-
mate returns on investment can be dramatically different than
expectations.Thisisespeciallytrueiftheinvestmentgrowthpe-
riod in question is 20years or less. Investorsin stock or equities
have learned this truth if their window of opportunity was from
1929-1949 or 1964-1984. Investors in bonds also do not always
escape the dreaded window of time as well. If interest rates are
extremely low in the beginning time period, like 1948, then re-
turns on bonds can also be substantially lower than the long-
term averages. This problem is not just associated with stocks
andbonds.Goldandcommoditieshavesufferedelongatedperi-
ods of stagnated returns. Buying gold at its absolute peak in
1980 ($675) and holding it for 20 years ($284 in 2000) sure
turned out to be a losing long term investment. Real estate does
notalwaysgoupasseveralpunditsarguedforcefullyinthemid-
2000s.Iexpectthattherealestatemarketwillsurelystagnatefor
anotherdecadeataminimumbasedonhistoricalprecedent.
Thefactisthatallinvestmentcategories,orassetclasses,are
highly volatile over time. The most important aspect of garner-
ing a respectable return on an investment is primarily deter-
mined by the starting date of your investment horizon and the
valueofthevariousassetclassesatthatpointintime.
1
FCINTRO 01/19/2012 17:4:46 Page2
2 TheSectorStrategist
In 2012, major asset classes like stocks, bonds, real estate,
gold, and commodities are either at long term averages or at a
peak in value. Historically we are in a time of excess valuation
that is closest to the early 1930s. Leverage is high, which will
damper the future returns of real estate. Bond yields are
extremely low due to excessive debt and Federal Reserve polic-
ies.GoldhasreturnedtorelativepricelevelslastseenintheRea-
gan era. The best of the bunch is most likely stocks. However,
when you examine the stock market based on a historical con-
text, value is also not at the low end of the spectrum. This pres-
ents a big problem for both the individual investor and pension
funds. This is due to the fact that expectations for long term re-
turnsaresolidlyinthe8%range.Overthelastfiftyyears,adiver-
sifiedportfolioofvariousassetswouldhaveprovidedforsucha
return. In the next fifty years, it is most likely that the same will
occur.But,the8%futurereturnwillmostlikelybebackloaded.
Thenexttenyearsdonotofferaninvestormuchhopetogarner
tosamereturnguarantee.
This text was written to provide an alternative to traditional
asset class investing and enhance the possibility of garnering an
aboveaverageinvestmentreturn.IbegininChapter1withade-
scriptionofreturnexpectations.Idiscussthehistoryofthestock
and bond markets over the past 100 years. You will learn what
returns have been generated by the stock and bond markets
overvariousperiodsoftime.Additionally,Ipresenttheassetsin
a historical context, so that an investor may better understand
how to better evaluate future return expectations. In Chapter 2,
I present my sector strategy. I present evidence on how tradi-
tional investing and correlation has changed over the past thirty
years.Idiscussanalternativetotraditionalbenchmarkingto the
index through sector investing. I describe the major sectors in
the economy and list which sectors have not only been the best
performersovertime,butalsotheleastvolatile.Chapters3,4,5,
6,and7presentmyrecommendedsectors.Thesearethesectors