The ‘All-In’ Portfolio
Anyone who is familiar with card playing understands that three of a kind beats a pair. However, it takes an entirely different level of skill and understanding to consistently win. This also applies to investing.
Texas hold ’em is one of the more popular poker games in the country because it moves quickly and quite often luck beats skill. You just never know.
The classic hold ‘em play is the all-in bet where the player pushes all his chips into the pot betting everything he has on that one hand. He either wins big or goes home broke.
The US Stock Markets led the world this past year, and investors frequently are disappointed by their returns because they aren’t what the headlines lead them to expect.
The reason for these disappointing returns is that prudence has been punished this past year. A diversified mix of stocks, bonds and commodities that has been proven to work well when stocks stumble, has been held back by the relatively lower performance of bonds and commodities in 2013. Only by making an all-in bet on stocks could one have achieved the results touted in the headlines. And, how many of us are willing to do that?
It is easy to second guess sound investment management strategies; but just because your house did not burn down this past year, you are not likely to cancel your fire insurance. We can’t change choices from the past; we can only manage the risk of the future. The risks of stock investing are still there even though they did not manifest themselves in 2013.
2014 was the first time in the past 18 years that the US Stock Market did not have a significant decline (re-testing its 200 day moving average for the technicians reading this). Anyone using risk-avoidance strategies that worked well in past years underperformed the stock indexes in 2013.
One should not base a diversification plan or an active risk-management strategy upon one year of results, but rather on what is observed to have worked over long periods of time.
What made this pragmatic approach even more difficult in 2013 was what is called home bias. If last year’s US stock market happened to be down, but Indonesia’s stock market was up 30%, no one would expect their entire portfolio to be up as much as Indonesia’s. More importantly, no one would have thought to put all of their money in one foreign country’s stock market, they would have diversified.
The reason investors may be disappointed this year is that home bias causes us to judge returns compared to the country in which we live. In reality, falling into this trap is just a form of cherry-picking a good country’s performance as your yardstick. It just happens that this year the country is ours so the results are more in-your-face.
If you had the guts to have gone all-in on the US Stock Market last January, ignoring the specter of rising taxes, a recession in Europe and the threat of the Fed cutting back its economic stimulus programs that were headlining the risk list a year ago, you would have had a great year. If you took steps to manage investment risks, you probably still made money – just not in headline-esque amounts.
A friend once said most financial news reporting is like pornography because it leaves you excited and confused. Don’t get confused and expect all-in type of returns unless you are willing to take all-in kinds of risk.
Interesting Stats…
I’m not sure who comes up with these presentations, but the link listed below leads to a fascinating set of maps that list the most popular names for girls, state by state, showing how they change over time. Check it out!
Six Decades of the Most Popular Names for Girls
How’s The Market Doing?
The stock market seems to be taking a breather, with the S&P 500 Index* being down about ½% since the first of the year.
At this point, I don’t think this is anything to be concerned about. As I have written about in past newsletters, this particular stock market presents a pattern of rallying sharply, then going sideways for several weeks before rallying again. The action since the first of the year looks and feels a lot like the pauses between past rallies, rather than a topping action.
The 20 stocks in the Dow Jones Transportation Average keep posting new highs. Generally speaking this means that business is good as more materials and goods are being shipped to factories and stores. This is a good sign for the economy.
US stocks have once again regained a performance edge over European Indexes, with emerging markets indexes trailing both, pulled down by struggling markets in China and Latin America.
The bond markets continue their one-step-forward-two-steps-back dance. Interest rates have dropped slightly since the beginning of the year, giving most bonds and bond funds a respite from the hammering they took last year, but I don’t think they are out of the woods as the long term trend looks to be for rising interest rates.
The Barclays U.S. Aggregate Bond Index (Symbol AGG) is 3.97% below its highs of the past 12 months. This is because interest rates on 10-Year Treasuries had doubled from their lows in 2012 to last week (this is being written on January 20th), and rising interest rates cause the prices of existing bonds to fall as they compete with new, higher rate bonds.
Keep in mind that long-term treasury rates are still about one half of their historic average of 6%. And when markets snap back from extremes, like the extreme low rates we have seen the past few years, they don’t just go back to the norm, they usually go way past normal in the other direction.
This means that interest rates are very likely to double again, and may even double once more after that. What will that do to bond prices? I can’t be specific, but I’d bet it’s gonna be ugly.
The one saving grace about the rising interest rate trend is that history suggests it will play out over many years, perhaps even over decades. Hopefully I will be able to recognize when a move is underway in plenty of time to take action to protect client accounts.
Gold and other commodity markets continue to languish as inflation stays low. The December CPI, posted by the U.S. Bureau of Labor Statistics, tells us we have a 1.5% inflation rate. Nothing to worry about there, unless you are a gold trader.
Time for a Review?
It is not my style to call you and bug you about your investments, but I am always happy to go over things with you. In fact it is important that we do reviews periodically so that we can ensure that our investment objectives are still in sync with your life situation. If you have not had a portfolio review for a while and would like one, please call the office at (928) 778-4000 to schedule an appointment, either in person or on the phone.
If you don’t feel the need for a formal review, please remember that it is important for you to call us if your financial situation, goals or sensitivity to risk change.
What’s Going On In Your Portfolio?
With the markets continuing on their positive path of the last year, both our Flexible Income and Shock Absorber Growth model portfolios are fully invested and are showing nice gains over the past few months, continuing as of this writing on January 21st.
Growth portfolios hold a mix of banking, health care, leisure, aerospace and pharmaceutical and biotech stocks.
Flexible Income portfolios hold primarily high yield and floating rate bond funds and a couple of high dividend stocks.
Municipal accounts are fully invested and have started off the new year with a strong rally, which is a nice surprise after the flat year munis had in 2013.
College Classes Coming – Fundamentals of Investing for Retirees
This is the class I began teaching 25 years ago at Yavapai College and has proven itself to be one of the most popular investment classes YC has ever offered. It will be held again from 1:00 – 3:00 p.m. on 3 Thursdays beginning February 6th.
This easy-to-grasp format is designed to help investors become more confident about their financial decisions. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk reducing strategies that anyone can use.
Contact the college at 717-7755 to register. The cost is $65, payable to Yavapai College.
Scottsdale Office Date
Please Call
Please do not email trading instructions or leave messages on our answering machine about trades or needing money from your account.
It is important that we confirm your instructions personally to ensure that they are actually coming from you, and also to get your acknowledgement that we understand the instructions correctly.
So please call the office and talk to a live person when you want to give us instructions on your account. (928) 778-4000.
Our Spotlight Strategy
With our Adaptive Growth strategy, we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Long/Short Equity strategy to range from 0% to a maximum of 80% of account value. The balance, 20% to 100% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced.
