2015 was a very difficult year in the markets. Some pundits say it was the toughest in 76 years. 2016 is off to the worst start in a Century! All this has many clients asking the same questions. We’d like to take a moment to address what is top of mind for most of our clients. Here is a sample of the questions we’ve received.
1) We are losing money. Both stocks and bonds are struggling, why stay in the
market?
2) 2015 was tough, 2016 is off to a horrible start. What changes have been made
to the portfolio?
3) Is our moving average process actually working?
4) What is our outlook for 2016?
In 2015, as measured by the benchmark indices, large company stocks, small company stocks, international stocks, emerging markets, corporate bonds, real estate (REITS), and commodities were either up 2%, flat, or down as much 30%! If you back out only a few stocks (Amazon, Google, Facebook, Netflix) every index was down. In order to make money in 2015 you would have had to take on a significant amount of risk. 2016 has started in similar fashion.
Given all this, why stay in the market? Virtually all of our clients have an investment time horizon of 10 years or more. Some of our clients, even longer. Due to very low global growth it is highly likely, for the foreseeable future, we will see low rates on cash. With inflation, cash is sure to be a loser.
Now, more than ever, it is paramount that INVESTORS have a very disciplined approach, are broadly diversified, and their advisors have a buy and sell strategy. Will International markets continue to significantly underperform? Will commodities continue to fall in the next 5 years? Will the energy market ever recover? These are the questions for the moment. Everyone tends to take their feelings and emotions at the moment and extrapolate to the future. This occurs in both great markets and bad ones. This is precisely why most investors tend to do so poorly in the markets.
Here are the changes we have made to our portfolios to address the current market volatility within the past 6 months. These changes are driven by both our 50 and 200 day moving average as well as the research analysts we follow:
1) In August our model portfolios (Aggressive, Moderate, and Conservative) had a reduction in stocks up to 30%.
2) Within our stock exposure we are underweight Medium sized companies, Small companies, and International companies. These decisions were made due to our moving average process.
3) We added Consumer Staples, Health Care, and Financials as tactical stock positions. Health Care and Consumer Staples tend to be defensive and US centric. Financials historically do well in a rising rate environment.
4) Within fixed income we significantly reduced our exposure to high yield bonds. This was due to our 50 and 200 day moving average process and the concern for bond values in the Energy sector.
5) We’ve discussed and removed virtually every client from our High Quality/High Yield stock portfolio due to the continued strength of the strong dollar and the impact to profits for multi- national companies in June.
6) Our moving average process triggered the reduction or removal of our Master Limited Partnership exposure in May.
Of course there are some exceptions based on every client’s unique situations, but these decisions have largely attributed to our models outperforming the comparable benchmark, on a consistent basis, net of fees. Of course our process isn’t perfect, but it has done a very good job of addressing the volatility in the markets.
As it relates to our outlook for 2016, we continue to see slow improvement in the US economy and challenges abroad. Some bright spots for the US have been employment, housing, and consumer spending. Headwinds have been wage growth and the impact of the energy sector. China, as well as many other international countries will continue to deal with the devaluation of currency, debt levels, and slower growth.
All else being equal, our moving average process helped us move out or significantly reduce our exposure to Gold, Commodities, MLP’s, High Yield, and Emerging Markets. The process moving forward will also uncover opportunities to move into.
Finally, and this is probably most important. Our experience suggests that most of our clients are less concerned about the return on their accounts than outliving their money. We have a great planning tool to address this concern and it really helps to redefine risk tolerance, goals, and future budgeting.
As always, please reach out if you have any questions or concerns.
Sincerely,
Steve, Brett, Aaron, and Becky
