As we alluded to last week, we are constantly looking to balance the risk and reward in our investment programs. We want to use volatility in our favor, especially where we are fairly hedged (Tailwind Equity) and/or holding cash (currently all other models).
More often than not, cash is a weigh station for us—a temporary place to park capital.
We rarely move from a cash to fully invested position all at once, especially during this type of volatility. We enter and exit positions based on the risk management of our process. Most times it is incremental. That said, we are seeing some evidence in our sentiment indicators that current moves are getting overdone (needless to say, a 20% overnight decline in oil doesn’t happen every day …).
Here is what we are looking to do over the next few weeks:
Tax Loss Harvesting. We are taking the opportunity to review tax loss harvesting in our Tailwind Equity program. Large moves down afford the opportunity to replace portions of our long dividend ETF positions. We want to take the tax loss when we can.
Adjusting hedges in Tailwind Equity. We utilize option collars in Tailwind Equity to help manage risk. Large downdrafts like we have seen the last couple of weeks sometimes give us chances to monetize the short call part of our hedging program. We plan to carefully fish some bids on these positions to see if we can get this done.
Preparing to unwind high quality bonds. Yields on US government bonds have collapsed. The entire US Treasury yield curve was trading below 1% this morning. While we don’t expect a huge backup from here, we think now is the time to close some of our US Treasury and US Investment Grade bond positions.
Preparing to buy US High Yield bonds. For the first time in a long time we are seeing the chance to add US High Yield bonds to our Blended Asset and Income models. Spreads have been too narrow for too long, so we haven’t used them much in our portfolios. That looks like it is about to change for the foreseeable future. This entry will take some care, but US High Yield is back on our potential buy list.
Preparing re-allocation changes. We have several clients lined up to add to their Tactical Equity and Blended Asset exposures. While our system to time those entries hasn’t triggered a buy yet, it does appear a lot closer to doing so. We try to take advantage of market discounts to make these changes whenever possible.
The key to making volatility work for you is having cash, hedging, and a plan. One has to load the Ark before the flood (which always hurts when markets are galloping higher).
As always, we continue to lean on our investment process, especially in these difficult markets. Our approach has been vetted through a multitude of market cycles. We rarely catch THE low, but we will be able to take advantage of the (further) upcoming market discounts, if and when we see things stabilize.
Please let us know if you have any questions.
Managing Director, All Season Financial Advisors