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Changing Allocations Again

Changing Allocations Again

            This marks the third time since January of 2018 that we are moving incrementally toward a more defensive position with our asset allocations, specifically within our Blended Asset Strategies (All Season, Foundations and Gain Keeper).  Last week’s bloodletting in stocks was another tip from Mr. Market that the risk/ reward ratio for global stocks is just not there.  

Reducing Allocations to World Stock Indices to 40%

            As a reminder, our Blended Asset strategies like All Season, Foundations and Gain Keeper annuity operate with maximum allocations to various asset classes.  Practically, that means we can invest up to a certain amount, by percentage, into the big asset classes like World Stock Indices, Alternatives/ Commodities and Income.  These maximum allocations are caps but not mandates.  We can own less of any asset class but not more.  In effect the maximum allocation numbers reflect the evidence surrounding inherent forward-looking risks and rewards.  

            Since January and October of 2018 (not 2019), Global stock markets are still down slightly but over the last 15 months we have also seen corrections of -12% and -20%, not including the madness of last week.  While we all want to consider ourselves to be that steady-under-pressure investor, we need to face reality.  Staying overweight in stocks while they are just trashing our portfolios with higher volatility, isn’t really a productive use of our capital.  

            These are the signs of an aging bull market that we have spoken of at length for over a year.  Forward returns for stocks, especially in the developed world are maybe 1-2% above inflation.  That works out to a return of 3-4% annualized on a total return basis (including dividends) until we see prices move back to attractive levels.   Last fall, we sent out several notices to all including many blog posts asking this basic question; 

             If you are planning or hoping to avoid potential significant losses in your investment portfolio when the real bear market in global stocks materializes, when will you develop a system of risk management and how will you implement it?  We asked the same question then as we will ask now.

If not now, then when?

            We certainly don’t want to become uber conservative and risk averse after stocks have lost dramatically.  No, the time to reduce your allocations to world stock indices is in fact now, when prices are still very close to the highs of the last 15 months and the highs of the last decade!  

            In January of 2018, we reduced our Max exposure to World Stocks by 10% from 70% to 60%.  In October of 2018, we reduce that maximum exposure again down by 10% to 50%.  Last week, we just shaved another 10%, lowering the total to 40%.  

Increasing Allocations to Income Bearing Securities to 45%

            As we decrease our maximum stock exposure, we need to find a home for the rest of the assets, right?  Well despite consensus opinion, bonds now offer some attractive relative and absolute returns for investors after nearly four years of no gains.   Today, we are 40% invested in bonds in our Blended Asset strategies and I’m pleased to say that our giant overweight position here made money last week, while stocks got hammered.  The benefits of diversification across asset classes is back!  Most of the bonds we own on this side of the portfolio are higher quality meaning Treasury bonds inside 10-year maturities.  We also own investment grade bonds, floating rate funds and preferred securities in smaller amounts. We are realistic about the total potential returns coming from our income allocations.  Interest rates are still hovering near 30-year lows after all and we can only squeeze so much blood from a stone.  But, here’s the important point.  Our 2.40% rates on a 10-year Treasury bond look incredibly attractive compared to zero % or negative rates found throughout the rest of the world among foreign bonds.  The world, including China, will not bail on the only bonds in their enormous sovereign wealth funds because we are the best thing they’ve got going in the income space.  It’s all about relativity with investing.  At this point, most Treasury bond owners are looking at the interest as a bonus while the price of Treasuries is still rising at an annualized rate of return of 16.75% since early November 2018. 

Fun facts even after an enormous run in stocks since last Christmas:

Returns from November 7th of 2018 through yesterday

                                                                                           Total return                       Annualized rate of return

S&P 500                                                                             -0.07%                                          -0.14%

7-10 yr Treasury Bond ETF (IEF)                            +8.05%                                        +16.75%

            Side note – for all those who have been drinking the Kool Aid (or listening to the White House talk about our raging economy and stock market), you must wonder why the Treasury bond market is telling another story by pushing toward an all-time high while stocks have gone nowhere for over 15 months.  The Fed has also changed course 180 degrees from their tightening policy.  Their next move will be a rate cut but we have to work through the quiet period of no change before that happens in early 2020 (just guessing).  Why would the Fed change course so quickly?  Hmmmm..

Reducing Allocations to Alternatives and Commodities to 15%

            Our maximum exposure here was 25% until the middle of April when we got stopped out of our commodities position again.  We are going to sit with a 15% allocation here for a while because we’re still finding some attractive opportunities in special situation type securities, like Berkshire Hathaway, currencies and a few specialty funds.  This sleeve of investments is intended to generate non-correlated returns to the broad US stock market.  

All in, we now have the following asset allocation maximum exposure levels in our Blended Asset Strategies:

World Stock Indices                                40%

Alternatives and Commodities          15%

Income                                                          45%

Total                                                             100%

            We offer this information now as we know that many investors, including our clients, are wondering what changes are happening in response to market and economic conditions.  Our shop is committed to dynamic asset allocation as witnessed above. We believe there are definite times to make adjustments to your overall exposures, while still maintaining a system that governs buys and sells at the individual security level.  Changes to your asset allocations are really strategic in nature, while the decisions of what to own and how much from week to week, are the tactical ones.  

            In the next update, I’ll provide insights into our other investment categories – Tactical Equity and Income and the changes happening there.  But that’s enough for one day.  I look forward to seeing a full house at our Solution Series event this evening in the Denver office as we reveal our two brand new investment strategies and discuss the evolution of others.

You can view all strategies here:  



Sam Jones