Portfolio Review after Not Much of Anything
Thought I'd share with your some highlights of our monthly porfolio review. We conduce this each month at some reasonable time after the end of the month. So this review was a review of our portfolios as of 2/28/19.
One quick initial observation: Our review didn't change our view that we're still not seeing much of anything going on - something we've harped on recently. We do continue to expect some sort of drop in stock prices in the short-term, followed by a bit longer-term uptrend in stock prices - with emphasis on "a bit." All of this is based on one of our trusty "brain trust" folks who give us some reasonable degree of insight into the shorter-term movments of market prices.
Now, before we get into specifics of this month's reveiw, one important point: This isn't a recommendation that you conduct a monthly review. If you're an individual, you don't really need to look things over that often - assuming you're comfortable with your asset allocation. This is especially true if you're a dyed-in-the-wool "buy and hold" investor who likes to keep your percentages in stocks bonds, gold, cash, or any other assets class relatively fixed over time. I say "relatively" because buy and hold does typically come with some sort of rebalancing discipline. Otherwise those percentages can get out of whack and you're not where you originally intended to be.
Setting aside rebalancing (which you can do at any interval you choose: daily, weekly, monthly, quarterly, semi-annually, annually, or any combination or other variation), it's generally best not to keep staring at your portfolio all the time. And with a buy-and-hold version, even monthly can be too often.
As for our monthly review process, it's driven primarily by the fact that, as professional money managers, we sometimes have funds flow in and out of client portfolios. This typically would be because they took or added money during the month. By perusing all client portfolios at month-end, we'll not only know who did this, but whether the amount subtracted or added materially affected the overall balance in the portfolio. If it did, then we can make adjustments.
How do we do this? It's simple. We created a basic spreadsheet that categorizes the individual positions in each clients portfolio into its appropriate asset class. So we can see the % that's invested in stock, bonds, cash, gold, etc. at a glance. The spreadsheet actually contains a bit more information than this simple breakdown, but we won't get into that now.
We also have a weekly report that can alert us to these cash flows, but we typically won't make changes on a weekly basis, just in case money in/money out winds up balancing out over the course of a month. That hardly happens, but it can. More importantly, we're not convinced that we need to respond to imbalance instantly. Monthly works fine.
So what happened this past month? Setting aside individual portfolio activity, there were some changes recently to our Core positions. Actually, they didn't occur until March 1st, so we didn't see them on the monthly report. But we know what they were after month end, so could easily see that our cash position increased significantly by a simple eye-balling of the monthly report. The increased cash was created when we sold a large bond position we held since the beginning of the year. That position was created when our tactical asset model signals called for an across the board sale of our Core stock positions on December 31st, to be replaced by the Core bond position we just sold.
Now, if that's a bit confusing, join the club. Typically our Core positions don't change that often, especially not back and forth. How did we interpret this recent action? Well, our thinking is something as follows:
We noted how extreme was the decline from October through December, and how the December decline was almost unprecedented (biggest since the Great Depression) - especially the huge drop on Christmas Eve, followed by the big bounce back before year-end. That extreme action triggered a Core stock position sell signal in our tactical asset allocation model (TAA). The stocks were replaced with a bond position of equal size. (That switch follows our Core portoflio buy-sell process.) But then the huge reversal in January-February (also virtually unprecedented) quickly generated a signal to sell the bonds and buy stocks again after only 2 months.
While disconcerting, this hasn’t undermined our use of TAA. But it had already caused us to reduce the total % of portfolio value we dedicated to our Core positions overall, and turn that reduction to Cash. It's our way of responding to an observation: "Hey, something wierd's going on." Historically, this sort of quick reversal hasn't happened in such a short time span. Hence the "wierd." Whenever something's a bit off, wierd, unaccounted for in our thinking, etc., we take note and get conservative, risk-averse - however you want to characterize it - until we've figured things out to the extent that we're comfortable with what we're doing again.
Here are some additional factors that caused us to reduce this Core %: We realize the past is not going to predict the future exactly. We know that the Central Bank actions in recent times are unprecedented. We realize that CBs can and do effect markets – sometimes purposively. Plus, we're chickens at heart, based on an intense dislike of losing money. Of course, we do realize that volatility can't be totally eliminated. And we accept a certain percentage of same. (Of course, we share this understanding with clients so they understand it too.) But if we feel that our current process might expose us to more volatility than we anticipated - for whatever the reason – we typically want to take a deep breath and reassess our allocation. That deep breath might consist of holding more cash than our current rules call for, at least temporarily.
I don't know if that's all clear, but it's basically what made us decide to take measures to conserve/reduce overall risk.
This month's portfolio review didn't cause us to reassess, or make any changes. It did, however, reinforce patterns we thought we saw over the last few months. Doing so, it confirmed our current (albeit likely temporary) chicken little stance.
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One quick initial observation: Our review didn't change our view that we're still not seeing much of anything going on - something we've harped on recently. We do continue to expect some sort of drop in stock prices in the short-term, followed by a bit longer-term uptrend in stock prices - with emphasis on "a bit." All of this is based on one of our trusty "brain trust" folks who give us some reasonable degree of insight into the shorter-term movments of market prices.
Now, before we get into specifics of this month's reveiw, one important point: This isn't a recommendation that you conduct a monthly review. If you're an individual, you don't really need to look things over that often - assuming you're comfortable with your asset allocation. This is especially true if you're a dyed-in-the-wool "buy and hold" investor who likes to keep your percentages in stocks bonds, gold, cash, or any other assets class relatively fixed over time. I say "relatively" because buy and hold does typically come with some sort of rebalancing discipline. Otherwise those percentages can get out of whack and you're not where you originally intended to be.
Setting aside rebalancing (which you can do at any interval you choose: daily, weekly, monthly, quarterly, semi-annually, annually, or any combination or other variation), it's generally best not to keep staring at your portfolio all the time. And with a buy-and-hold version, even monthly can be too often.
As for our monthly review process, it's driven primarily by the fact that, as professional money managers, we sometimes have funds flow in and out of client portfolios. This typically would be because they took or added money during the month. By perusing all client portfolios at month-end, we'll not only know who did this, but whether the amount subtracted or added materially affected the overall balance in the portfolio. If it did, then we can make adjustments.
How do we do this? It's simple. We created a basic spreadsheet that categorizes the individual positions in each clients portfolio into its appropriate asset class. So we can see the % that's invested in stock, bonds, cash, gold, etc. at a glance. The spreadsheet actually contains a bit more information than this simple breakdown, but we won't get into that now.
We also have a weekly report that can alert us to these cash flows, but we typically won't make changes on a weekly basis, just in case money in/money out winds up balancing out over the course of a month. That hardly happens, but it can. More importantly, we're not convinced that we need to respond to imbalance instantly. Monthly works fine.
So what happened this past month? Setting aside individual portfolio activity, there were some changes recently to our Core positions. Actually, they didn't occur until March 1st, so we didn't see them on the monthly report. But we know what they were after month end, so could easily see that our cash position increased significantly by a simple eye-balling of the monthly report. The increased cash was created when we sold a large bond position we held since the beginning of the year. That position was created when our tactical asset model signals called for an across the board sale of our Core stock positions on December 31st, to be replaced by the Core bond position we just sold.
Now, if that's a bit confusing, join the club. Typically our Core positions don't change that often, especially not back and forth. How did we interpret this recent action? Well, our thinking is something as follows:
We noted how extreme was the decline from October through December, and how the December decline was almost unprecedented (biggest since the Great Depression) - especially the huge drop on Christmas Eve, followed by the big bounce back before year-end. That extreme action triggered a Core stock position sell signal in our tactical asset allocation model (TAA). The stocks were replaced with a bond position of equal size. (That switch follows our Core portoflio buy-sell process.) But then the huge reversal in January-February (also virtually unprecedented) quickly generated a signal to sell the bonds and buy stocks again after only 2 months.
While disconcerting, this hasn’t undermined our use of TAA. But it had already caused us to reduce the total % of portfolio value we dedicated to our Core positions overall, and turn that reduction to Cash. It's our way of responding to an observation: "Hey, something wierd's going on." Historically, this sort of quick reversal hasn't happened in such a short time span. Hence the "wierd." Whenever something's a bit off, wierd, unaccounted for in our thinking, etc., we take note and get conservative, risk-averse - however you want to characterize it - until we've figured things out to the extent that we're comfortable with what we're doing again.
Here are some additional factors that caused us to reduce this Core %: We realize the past is not going to predict the future exactly. We know that the Central Bank actions in recent times are unprecedented. We realize that CBs can and do effect markets – sometimes purposively. Plus, we're chickens at heart, based on an intense dislike of losing money. Of course, we do realize that volatility can't be totally eliminated. And we accept a certain percentage of same. (Of course, we share this understanding with clients so they understand it too.) But if we feel that our current process might expose us to more volatility than we anticipated - for whatever the reason – we typically want to take a deep breath and reassess our allocation. That deep breath might consist of holding more cash than our current rules call for, at least temporarily.
I don't know if that's all clear, but it's basically what made us decide to take measures to conserve/reduce overall risk.
This month's portfolio review didn't cause us to reassess, or make any changes. It did, however, reinforce patterns we thought we saw over the last few months. Doing so, it confirmed our current (albeit likely temporary) chicken little stance.
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