The last few trading days have not felt comfortable but market sensitivity to a headwind like a Coronavirus is not surprising. While the fear of a more serious outbreak is a legitimate concern, progress towards containment with immaterial impact on global economic forecasts is still the expectation and therefore we recommend staying the course. We did not predict this virus, but we did know that the market would not keep going straight up forever. The real takeaway is that we have already designed portfolios to account for these types of surprise downside catalysts.
The most important layer in building a portfolio is coming up with the right mix of stocks and bonds based on each client’s financial plan. Most research shows that timing the markets is near impossible. We still study a plethora of market and economic data to gain an understanding of our environment, but we are not using it to make large bets in the portfolio. Just take the last two years where economic data was no barometer for market results. In 2018, economic growth grew by 3%, the highest clip in almost a decade. Corporate earnings in the US grew by 24%. Two extremely significant, positive data points, and yet markets were down. In 2019, the gross domestic product grew by 2.6% and corporate earnings grew by 1%; lackluster numbers but diversified portfolios saw stellar gains.
We aim to hold most of our positions over full market cycles where we believe broad diversification will prevail. We will then layer on smaller, tactical decisions based on shorter-term data points such as the ones discussed above. The goal is to maximize returns while knowing that none of these smaller decisions will make or break long-term performance. You likely have heard us make the baseball analogy in our meetings; “We’re aiming for singles and doubles with the goals of avoiding strikeouts”. Below you will find a brief summary of the tactical decisions we made in 2019. Most of these trades shared a common theme in which we were making gains in areas that did well and reallocating to lower-risk assets in an effort to provide more downside protection when we need it:
- Sold corporate bond holding in favor of mortgage-backed securities
- Reduced large-cap growth index exposure in favor of quality factor screen
- Swapped the Vanguard index funds for State Street to reduce the ongoing expense ratio
- Reduced small-cap and foreign exposure in favor of US large-cap companies focused on dividend growth
It was a rewarding 2019 for most investors and we believe portfolios are well-positioned as 2020 gets underway, even amid the current heightened volatility. As always, feel free to contact your team with any questions or concerns.
The foregoing content reflects the opinions of Connecticut Wealth Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.