Our WealthProtect System (a valuation-modified moving average crossover system) in early June indicated for us to liquidate large foreign, emerging market, and natural resource equities across our portfolios. In lieu of leaving all the proceeds in cash, we reinvested the majority of the proceeds. Let me explain which asset classes and why.
First, I believe that due to the uncertainties surrounding Europe it is unlikely we will have a reentry signal any time soon. I also believe that it may take major equity market pain to force the European leaders to make real progress. Additionally, this will likely spill over to US markets to a lesser extent.
Still, US markets seem to have decoupled from foreign markets for the time being. Election years also tend to have positive returns. It is entirely possible that US markets have a fairly good second half while foreign equities languish.
Consequently, we reinvested in an S&P 500 index investment, an investment grade corporate bond investment and a global macro investment to give our portfolios a combination of downside risk reduction and some upside capture opportunity. The latter two, for example, had positive returns in the month of May when equities suffered.
So how has this altered our Growth with Income model, for instance? The normal portfolio has 56% equities (including real estate and natural resources), 29% fixed income, 10% non-traditional, and 5% cash. It currently sits at 40% equities, 34% fixed income, 15% non-traditional, and 11% cash.
While this portfolio will likely underperform if the markets take off for a tremendous bull run, it is designed to help protect in a sideways to down market. With the existing risks in Europe, potential economic slowdown in China, and weakening economic numbers here at home, I believe the portfolio to be appropriately positioned.
Another way we are dedicated to growing and protecting your wealth.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. No strategy can guarantee a profit or protect against a loss. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and changes in price. S&P 500 is am unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results. Nontraditional investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Our WealthProtect System has triggered for us to exit emerging market equities for our Strategic Asset Management Accounts. This is in addition to the exits made last week to foreign and natural resource equities.
I believe we will likely be out of these markets for the balance of the summer-at least until there is some confidence that the Eurozone situation is being resolved and that Europe's recession will not drag the rest of the world with it. Unless the Eurozone crisis gets out of control, however, I don't see US equities dropping to the extent it causes us to exit them. In other words, I see the US equity markets as having decoupled to some extent from foreign markets. As some have put it, they are the "least dirty shirt."
Historically, US equity markets do well in election years-albeit with the majority of the gains coming in the fourth quarter. At the same time, we can't deny the current risks in the global economic system and the political uncertainty at home. Based on these competing concerns, we will re-invest the majority of the proceeds into investments that we believe better positions our portfolios for the near term.
For our Aggressive, Growth and Growth with Income models we will invest in a combination of large company equities, corporate bonds, and a non-traditional investment. Our more conservative Income with Moderate Growth and Income with Capital Preservation models will not have the large company equities.
I believe that this mix will likely well position us if the market volatility persists and attempt to provide some downside protection while maintaining the opportunity to participate on the upside if the Eurozone crisis is resolved in the short term. Overall this is likely a short to intermediate term move until this time of crisis has passed. And as always, no strategy can guarantee a profit or protect against a loss.
Please call your wealth manager if you have any questions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult you financial advisor prior to investing. Past performance is no guarantee of future results.
Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity.
The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
In early March we re-entered the foreign and natural resources markets in our flagship portfolios based on our investment and WealthProtect disciplines.
Since the equity markets have made nice gains since the beginning of the year, it is likely we will have a pullback at some point—maybe even soon. Our analysis, however, points to re-engaging in these markets because foreign markets are perceived to be fundamentally undervalued, monetary conditions are positive, and our WealthProtect technical indicators have turned positive as well.
Our firm is dedicated to growing and protecting our clients’ wealth. We design portfolios to attempt to capture upside gains and we have a sell discipline in order to potentially limit losses.
If you are a client, call your wealth manager if you have any questions. If you are not yet a client, contact us and we would be happy to answer your questions also.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. No strategy assures success or protects against loss. Past performance is no guarantee of future results. International investing involves special risk such as currency fluctuations and political instability and may not be suitable for all investors. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
The second trigger for foreign equities in our WealthProtect System recently triggered. This means by the time you read this we are likely to have sold in our flagship portfolios both developed and emerging foreign equities.
While I personally view most foreign equities as undervalued and from a longer-term perspective at a decent entry point, our system is designed to unemotionally signal when the apparent risk outweighs the potential near-term benefits. Keep in mind there is an excellent chance this will reverse in the upcoming months as our system does have false signals. If we do have more downside in foreign markets, then the opportunity to re-enter at a more attractive level may present itself.
As a reminder, our WealthProtect System has two triggers for each of the major asset classes we follow. When we view the market has fairly or overvalued; only one trigger is necessary to exit equities. When the market is undervalued like right now in our perspective, then two triggers are necessary.
By the way, the domestic component does not look as if it will trigger anytime soon.
*The opinions in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. No strategy assures success or protects against loss.