The market environment and your portfolio's "capture ratio" are the two greatest determinants of your long-term investment success

At a recent meeting of our investment committee, we agreed that in 2008 we will do all we could to expand the boundaries of investment education for all who come in contact with Emerald Asset Advisors. We certainly don't know it all, but we do feel our disdain for conventional wisdom and our non-traditional investment approach allows us to have some insights that are not widely disseminated to the investment public and much of our industry.

For instance, we are working on a study which we feel helps whittle down investment success to two very significant factors. This is not to say that growing and preserving capital is easy; but having the perspective we will share here may just open the door to a higher level of understanding for you. We expect to publish this information in a more detailed form in the future, but as usual we want the readers of GreenThought$ to see it first. We'll do this in two parts. Part two will be sent to you next week.

Market environments vary greatly from period to period. I'm not talking about days or weeks, but rather a series of months and years. Using monthly return data from Yahoo Finance on the S&P 500 Index back to 1950, we noticed that the frequency of positive monthly returns for the index could be very different from one investment era to the next. Here are different periods of time, and the percent of months in that period in which the S&P went up. I've added a short description of each period to remind you what was going on in the world and markets at the time:

                      % UP
YEARS             MOS.
1950-1960:    56%  Post World War II, the U.S. takes a leadership role in the world

1960-1965:    64% "Camelot" - Kennedy Administration and eventually, the start of the Viet Nam War

1965-1982:    51%  A long, difficult secular bear market for stocks. Recession, war and social unrest.

1982-1990:    59%  The start of the biggest economic expansion in decades (and the bubbles that followed)

1990-2000:    71%  The era in which investing went mainstream and Wall Street rode high. Tech was king.

2000-2003:    37%  The bubble bursts. 40%+ losses in major stock indexes over three years.

2003-2007:    68%  "Bubble - part two." Markets rise without a major decline.

Now let's look a bit closer. The 1950s were a period of solid market gains. The 1960s started fine, but eventually we entered the worst extended period in modern market history. During the 1965- 1982 bear market, the S&P 500 went up only six months out of each year, on average. As a result, market returns were near zero, and that's before the impact of inflation, which was at a very high level in the 1970s. As you can tell, if the stock market only goes up half of the time (in terms of months), making a reasonable profit is very difficult.

The remainder of the 1980s showed a higher trend, except for the short period around the1987 crash. Still, monthly returns moved back to the range where solid profits could be made.

When you see the 1990s on this chart, it gives you an idea of just how "easy" that decade was in investment history. Let's face it, if your monthly statement is up in seven out of every ten months, you feel like a genius. But too many people got used to that feeling, so when the bubble burst in early 2000, they were caught completely unprepared. All of a sudden, your monthly statement was negative most of the time. That is why we heard many say back then that they did not even open their statements for months. Many investors assumed that the market going up 70% of the time was "normal" and to be expected. Unfortunately, this is still part of the psyche of many market participants.

During the bubble's encore from 2003-2007, the market rose over two-thirds of the time, that feeling of complacency came back. We have often heard it said by people in our industry that "the stock market goes up 70% of the time" and this is the justification for the buy-and-hold strategies that pervade the industry. Our look at the last 57 years shows us that the 70% figure is an exception, not the rule. Different market environments have very different impacts on the same portfolio.

In next week's GreenThought$, we'll finish this thought by explaining what a portfolio's "Capture Ratios" are, and we'll tie it together with the market environment info shown here. We will also show you why you have more control over your portfolio's capture ratios than you have over the market's movements.

Bottom line: there will be good markets and bad markets. Since predicting the future is not anyone's best talent (especially economists and weather people), knowing how much of the ups and downs will be "captured" by your portfolio leaves you much better prepared to navigate the markets as a long-term investor.

(c) Emerald Asset Advisors, LLC

www.emerald-eas.com