The exhilaration of watching your portfolio rise in value mid week last week pales in comparison to the depths of anguish and despair you felt when five to seven percent of your market value was erased such as in the weeks prior. Because zenith valuations are not finite, but fluid, one rationalizes that he hasn't really lost anything when the account value goes "down"....it always "comes back" over time. But seriously, who swallows that sort of justification when the monthly statement comes in the mail showing portfolio valuations minus several tens of thousands of dollars?
For
that reason alone, I am loathe to accede to client demands that we go "all in", or "stop
playing it so cautiously". As I said last week, recovering from portfolio
draw down is a most difficult task statistically and psychologically. I must never forget that these are my
clients' monies, not mine, and that I serve as steward to their financial
objectives. The markets are a tough
place, and not for the faint of heart.
Uppermost,
we must remember that investing involves time, process, methodology, risk, and
patience. There are no guarantees about
return on equity, but there are rewards usually for those who don't panic.
Thus,
a steady deterioration during the past several weeks in portfolio values, and
the global bourses themselves, should not have been unexpected. A decline in energy prices might have caught
the "experts" off guard, but the potential for a market capitulation,
even a big one, has been something my quantitative integers have been indicating
for several months. October's decline
was swift and difficult to take.
December seems to have its own agenda for swoons and gains.
One
reason why sector allocation is more important than stock picking is that indiscriminate over weighted concentrations of
underperforming stocks can have a deleterious impact upon portfolios, whereas, in the right proportions, even bad
stocks within specific groups might not have a correlated impact upon portfolio
performance relative to the benchmarks.
In
addition, one's timeline of expectations is critical to the analysis. We should know by now that it is impossible
to guess correctly every short term swing in prices of stocks and bonds. Instead, rather than "timing"
trades, it is better to focus upon demographics and secular shifts in culture,
population, social trends, geography, politics, and money flow (fiscal and
monetary policy). From there, it is more
likely to make educated decisions, even if they are unique to each investor, about
how money can be put to work to achieve your growth aspirations for the longer
term. I favor Technology, Industrials,
Cyclicals, Alternative Energy, Biosciences, Agriculture, and Basic Materials
for those tasks.
While
I view economic data as becoming decidedly more positive, my concern is the
unusual volatility of short cycles and emotional responses which can interrupt
the strength of our portfolio building.
Indeed, as mentioned earlier, it is no fun seeing five percent or more
in portfolio losses in one month through no "fault" of our own,
except for manic mood and price swings in one or two sectors.
Support
Do
we thus conclude that investing is all for naught, a big waste of time? Absolutely not. Our discipline and processes are oriented
specifically towards balancing risk during the kind of volatility that we are experiencing
now. For example, prior to the dot.com
debacle in 1999-2000 clients may recall that we had begun to shift our asset
allocation away from technology shares because (1) valuations had become
unsustainable and excessive and (2) there were few real earnings-driven
companies in that space at that time. In 2008, as the run up in credit
deconstruction was occurring, we were devoid of any Financial shares and had
already pared down our exposures to lengthy bond maturities in our balanced
portfolios because our screening tools
had flashed warning signs about excessive borrowing in the global
marketplace. While I might be sitting
with "too much" cash today, the parallels to an unsustainable
valuation rally and a decline in relative strength integers is uncanny, a
situation which has persisted since April of 2013!!
If
we wind up missing the targeted benchmark return, so be it. The reward is avoidance of a flash-point
decline that can do serious harm.
We
will continue to be invested, in the proportions we deem appropriate to our client's
risk/reward tolerances, and to do so with a respect for our client's families
and long term objectives.
(Our
next posting will be the Quarterly Commentary: January 1, 2015)
Happy
Holidays!!
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