Anatomy of an Investment Strategy

Here's some background on RealMoney contributor Steve Birenberg's long-only, fully invested approach.
Publish date:

It's still not too late to send one more wish of happy new year to my fellow investors. It's also not too late to say "good riddance" to 2008, a horrible year for most investors, especially those like me who follow a long-only, fully invested strategy.

Long-only, fully invested strategies are catching a lot of grief these days. I'm not here to have that argument. It is my reality, and rightly or wrongly that won't be changing anytime soon. I do believe, however, that it is a good time to explain the history and details of my long-only, fully invested strategy. For


subscribers, this might offer some ideas for managing some or all of your money. It also will help you better understand the daily commentary and weekly columns I write.

I manage money exclusively for high-net-worth individuals and their related entities, such as trusts, IRAs and charitable accounts. In some cases, I manage all of a client's liquid assets. In other cases, I manage a portion dedicated to beating the market's return as measured by the

S&P 500


When I first take on a client, a lot of time is spent understanding the client's objectives for the money, how the money fits into the client's larger financial and life picture and how much risk the client is willing to take.

Ultimately, my clients break down into just a few groups. For those for whom I am investing all of their liquid assets, I first determine asset allocation between stocks, bonds and cash reserves. A range is established around the target for each asset class. For clients for whom I am investing only a portion of their liquid assets, in every case the money is risk capital with the expectation that it will be invested solely in stocks and cash reserves. In both cases, cash reserves typically range from 3% to 15%. The upper range of 15% was enough to help last year, as having it through the year would have saved about 6% vs. a fully invested strategy focused on index funds.

(Don't miss:

'Cubes' Drops Into 'Also Ran' Territory


Avoiding Mea Culpas With Alternative Assets


Over 90% of the assets I manage are invested in stocks. For clients for whom I manage all the liquid assets, a portion of the stocks are held in a series of index funds designed to match their long-term growth objectives and tolerance for risk. Typically, this amount represents 40% of the funds planned to be invested in stocks.

The balance of the funds, as well as all of the assets for clients providing me with only risk capital, are invested in a strategy I developed combining thematic index rotation with focused investments in individual stocks in media and telecom. This portion of the stock market portfolio usually has 30% to 40% of the assets invested in each of two thematic strategies and 20% of the assets in media and telecom stocks.

The balance of this column and the series of articles to follow in the next two weeks are designed to explain this last piece of my investment strategy. It is the part of the strategy designed to outperform the S&P 500. It is also the part of the strategy that I reference in almost all of my commentary for



The general concept is that investing in index funds on the basis of themes can produce consistent and material excess returns while providing an acceptable level of diversification. Diversification provided by the index funds in the thematic strategy is important, because it allows me to adopt a narrow strategy within the 20% of the portfolios invested in individual media and telecom stocks.

Ideally, the strategy has client funds invested in major themes that are outperforming the market and in individual stocks that beat the market and the peer group of media and telecom stocks. In 2008, the strategy produced a return that matched my S&P 500 benchmark. In 2007, the strategy produced a return that was about double the market. In 2006, the results equaled the market. In 2005, the return was also about double the market.

I started building my firm upon this strategy in late 2004 after spending 22 years investing funds for clients at two prior jobs. I use this strategy for over 80% of the funds held in my own retirement accounts. Of my retirement assets, 20% are held in a rental real estate investment. My non-retirement accounts are invested to pay for my children's college educations and provide an emergency reserve. With one junior at NYU and a senior in high school headed to a private university, my non-retirement funds are almost entirely in vested in cash and short-term bonds.

Part 2 of this series will be

published on Friday

. It will focus on the general thoughts and historical development behind the index rotation strategy. Two more columns will follow next week, one explaining the two models in detail and one discussing my approach to individual stocks in media and telecom.

Know What You Own:

In early trading on Wednesday, equities with the heaviest trading volume included the

S&P Depositary Receipts

(SPY) - Get Report



(INTC) - Get Report


Bank of America

(BAC) - Get Report


PowerShares QQQ Trust




(C) - Get Report

, the

Financial Select SPDR

(XLF) - Get Report





This was originally published on


on Jan. 7, 2009. For more information about subscribing to


please click here.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback;

click here

to send him an email.