As noted last week, we raised cash levels in portfolios over the last couple of weeks. Notably, we had sharply reduced our bond portfolios’ duration by shifting treasuries to short-term bonds and selling mortgage-backed securities. That shift helped hedge portfolios a lot of the last few days. We remain fairly allocated to equities at the moment, but we will likely start using counter-trend rallies to reduce risk further if the markets don’t begin firming up next week. After this week’s selloff, the market is getting fairly oversold, so a counter-trend bounce would not surprise us. As we discussed with our RIAPRO Subscribers, some defined “bearish” patterns continue to form on the S&P 500, Nasdaq (shown below), Emerging, and International markets. There is much commentary about the
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As noted last week, we raised cash levels in portfolios over the last couple of weeks. Notably, we had sharply reduced our bond portfolios’ duration by shifting treasuries to short-term bonds and selling mortgage-backed securities. That shift helped hedge portfolios a lot of the last few days.
We remain fairly allocated to equities at the moment, but we will likely start using counter-trend rallies to reduce risk further if the markets don’t begin firming up next week. After this week’s selloff, the market is getting fairly oversold, so a counter-trend bounce would not surprise us.
There is much commentary about the rotation to “reflation” sectors like industrials, materials, energy, etc., which will benefit from a reopening economic surge. While we already own these sectors, it is essential to remember very little “value” in the market.
We will likely see a boost in economic growth this year. However, that growth has already gotten well priced into the market at every level. Valuations are extreme across every market. Such places the market at risk of disappointment if expectations fall short.
If history is any guide, it is highly likely we will be disappointed as we move further into the year.
What To Do Now
While this past week was rough, particularly for more aggressively allocated models, it is crucial not to let short-term psychological pressures derail your investment discipline.
As we have discussed previously, “risk happens fast.” As such, it is essential not to react emotionally to a sell-off.
Instead, fall back on your investment discipline and strategy.
- Is the premise of why you bought a position previously still intact?
- Has anything fundamentally changed for the company?
- Review the positioning of your portfolio relative to the benchmark? Are you out of tolerance in your allocations?
- Review your positions. Are they out of tolerance relative to your sizing rules?
Last but not least, keep your portfolio management process as simplistic as possible.
- Trim Winning Positions back to their original portfolio weightings. (ie. Take profits)
- Sell Those Positions That Aren’t Working. If they don’t rally with the market during a bounce, they will decline more when the market sells off again.
- Move Trailing Stop Losses Up to new levels.
- Review Your Portfolio Allocation Relative To Your Risk Tolerance. If you have an aggressive allocation to equities at this point of the market cycle, you may want to try and recall how you felt during 2008. Raise cash levels and increase fixed income accordingly to reduce relative market exposure.
Nobody ever went broke taking profits.
While keeping your capital intact is hard, making up lost capital is even harder.
If you need help or have questions, we are always glad to help. Just email me.
See You Next Week
By Lance Roberts, CIO
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Model performance is a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. Such is strictly for informational and educational purposes only, and one should not rely on it for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.
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