Looking back at 2012, it appears a so-called smart money strategy turned out to be anything but smart.
In Wall Street parlance the strategy is called risk-on / risk-off.
In a nutshell investors move quickly and nimbly -- putting money to work in securities deemed aggressive when the market appears bullish – but then quickly rotate that same money into safer securities when the environment appears bearish.
"Let 2012 be a lesson to you," mused Jim Cramer in retrospect. "Had you followed this strategy you would have underperformed."
Why did risk on / risk off fail in 2012?
"First, and foremost, the S&P 500 gained 13.5% last year, 16% if you include reinvested dividends," said Cramer.
"One thing we know for sure, those who played this on off switch game, this binary nonsense, didn't get to reinvest those dividends which, once again, were a hugely important component of the year's performance."
Europe proved particularly problematic for risk-on / risk-off investors. "Many EU stocks performed miraculously," said Cramer.
But had you switched into risk-off mode - you either missed the move or worse
"Had you flitted from risk-on to risk-off and back again you probably sold low and bought high pretty regularly," said Cramer.
In other words, the 'riskiest' moments – when you'd otherwise rotate into bonds –ended with big gains in stocks.
What's the point of this analysis?
"I ran money for 30 years before this "risk-on, risk-off" strategy came into play," said Cramer. "I am beginning to believe that it is simply a by-product from those who refuse to do individual stock homework or can't think of anything to say.
And according to Cramer nothing is more important than doing homework; that is sifting through earnings reports and doing research to identify a company with solid fundamentals, good management, strong growth potential and one that trades at a reasonable multiple.
When compared to risk-on / risk-off, homework may seem tedious and old fashioned but sometimes the best investment strategy is the one that's stands the test of time.
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