A phrase I always try to keep in mind during times of higher
market volatility is “the markets tend to take the stairs up and the elevator
down”. For me, this helps keep the long
term goals of our clients in perspective when the stock market gets choppy.
Our investment philosophy centers on the belief that the
most effective way to achieve your goals is to determine the appropriate level
of risk and to consistently rebalance your portfolios to that allocation. Rebalancing involves buying or selling assets
in your portfolio to maintain your original desired level of asset allocation. Instead of simply rebalancing the portfolio
on a given day each year, we try to choose times throughout the year when
certain asset classes have drifted from the target allocation in a meaningful
way (5-10%). This helps us ensure that
we are sticking to the age old method of “buy low and sell high”.
The majority of our clients tend to describe themselves as
more conservative, essentially, willing to give up some of the upside to
protect more on the downside. Because of
this, we will from time to time position our portfolios in a slightly more
conservative manner (as we did during the summer). Our thought process at the time was that the
market had been on a relatively straight upward path with very little volatility. We felt there was an opportunity for some
pullback in the markets that would allow us to rebalance the accounts to the
appropriate long term allocation, this allowed us to sell a portion of the
better performing assets in the accounts while they were up in value and be
slightly more defensively positioned in your accounts for the past few months.
Even with the recent slide in the stock market, Large Cap US
Stocks are still up around 3% Year To Date, and 12% over the last 12 month. Other asset classes have not performed as
well, with the International Index down 6% YTD and Small Company Stocks down 7.5%
YTD. This recent market sell-off,
combined with our already defensively positioned portfolios, has moved our
actual allocation to a relatively significant underweight to risk assets. For example, if your target allocation is 60%
Risk (aka Equities or Stocks)/40% Stable (aka Fixed Income or Bonds) your
current position is closer to 50/50. We
look at this as an appropriate time to buy back up to 60% Risk in those
portfolios.
Another aspect we monitor is the performance of different
sectors of the economy. In our
portfolios this year we have owned Technology (+7.5% YTD), Healthcare (+11.5%
YTD) and Real Estate (+14.5% YTD) as over-weights to our Large Cap US Index
position (+3% YTD). This has certainly
benefited our Large Cap US component of the portfolio. We will use this opportunity to rebalance
those positions, along with slightly reducing our exposure to Technology and
International in our Targets. We will
add a small allocation to a new position in a sector that has been down 6% YTD,
US Industrials (to give you a sense some of the top holdings in this index are
GE, Union Pacific, UPS, Raytheon).
We will continue to implement most of these changes by using low-cost indexes of Exchange Traded Funds. If you have self-directed accounts (401k plans, etc.) that may have drifted away from your target allocation you may want to take this opportunity to review them and rebalance as well.
We want to be clear, these moves are not a bullish stance on
the markets. They are in our minds
simply sticking to our long term philosophy of rebalancing portfolios to their
appropriate allocations. We could
certainly continue to see short term volatility in the stock market. In general, we think trying to predict the
short term movements of the markets is a losing game long term. Knowing the appropriate level of risk based
on your goals & time horizons, and remaining disciplined to our approach is
the best way for us to help you achieve your long term objectives.
