When I first entered the business way back in 1995, it was quite common to look at portfolios and see a diverse set of assets including precious metals, commodities, hedge funds and CTAs, as well as, equities and fixed income or bonds.
Over the past ten to fifteen years however, the amount of market intervention by Central Banks and from global governments has made such diversification almost mute. Today, it’s much more common to see just portfolios of stocks and bonds. Investments in precious metals, commodities, hedge funds and CTAs (for the most part) have been underperformers. A loser’s game!
I mean had we all known then what we know today, we would have all just bought the S&P 500 index right? We would have learned to deal with the market volatility knowing that each market decline would spawn a reaction by global central banks and governments to prop back up the ailing markets. However, as we all know hindsight is 20/20!
I still marvel at why such parties cannot let the markets do what they do best, i.e. run in cycles of boom and bust. The busts bring sanity to the markets and help to eliminate the bad players. They have to realize that when this managed market does end, it is going to end very badly for many participants, or maybe that is the plan? Who knows?
My point is that a portfolio today that includes 60% equities and 40% bonds is not really diversified when stocks are at nosebleed valuations and bonds are at historical thirty-year lows in yields and near zero yields. The protection that bonds now afford investors to hedge equity volatility is muted at best if not non-existent. I can actually envision a scenario where both stocks decline, and bond yields rise, and investors lose money on both sides of the portfolio at once.
So, what is an investor to do?
Since markets are mean reverting, I believe we need to start to look to the past to move forward into the future.
This means a slow reversion back to portfolios that are more diversified and contain assets classes that have historically provided some shelter in the storm, whether that is equity market volatility, rising deflation or inflation, currency devaluations and more.
In a study that Artemis Capital Management performed in January 2020, they found that over the past 100 years it was common to have periods like we have had whereby growth reigns fueled by the virtuous cycle of value creation and rising asset prices. The growth cycle began naturally through a combination of favorable demographics, technology, globalization and economic prosperity. However, such growth eventually became corrupted by greed. Fiat currency devaluations and debt expansion replace fundamentals. Isn’t that exactly where we are today?
Those growth periods were followed by periods where the corrupted growth cycle was destroyed. This destruction led to a periods of either deflation or inflation, many times alternating from one to the other. The deflationary path was caused by an aging population which leads to low inflation, faltering growth, financial crashes and then debt defaults. The inflation cycles were led by fiat currency defaults, and helicopter money. Maybe you recognize the helicopter money as the latest $600 stimulus checks just approved by the Congress?
During these latter periods of corrupted growth and intermittent periods of deflation and inflation, they found that traditional portfolios of 60% equities and 40% bonds underperformed. What they found is that more diversified portfolios that included commodity trend followers, precious metals and volatility traders significantly outperformed the latter 60%/40% portfolios during these periods.
We believe we are in the latter stages of that corrupted growth cycle.
The transition has to start now to more diversified portfolios that include more than just equities and bonds. To more of the diversified portfolio like you see above that Artemis has called the Dragon Portfolio.
We will write on this later, but we also believe that means a renewed importance of having both passive index strategies and active investment strategies in your portfolio, a multi-disciplined portfolio as we call it.
Just like the latest fashions, what is old is new and what is new is old. Funny how that works!
So, the question becomes “what’s in your portfolio?” If this is not a discussion you are having with your advisor, it may be time to find a new advisor? Let us know if we can help.
Just a few weeks ago, the headline risk was all negative. The narrative was that Covid-19 was spreading throughout the world in a second wave. Countries were closing down again. Would the U.S. be next to close down like in early 2020 and it was rumored this would most likely happen with a Biden win?
Speaking of the Presidential Election, the main-stream media did a pretty good job of fear mongering regarding that election. What if Trump won? Would there be rioting in the streets and general unrest? The narrative went that such unrest could be very negative for your portfolio and for America!
Turns out the Trump has not won (at least not yet as he pursues legal action in various swing states). Instead, Joe Biden appears to be the overwhelming favorite to assume the role of President come January.
Then recently, Pfizer announces a possible vaccine for Covid-19 with 90% effectiveness. Stocks of course are rallying like there is no tomorrow on the news and breaking to fresh highs clearing technical hurdles that just a few days ago we thought might lead to a market reversal.
The cynic in me wonders if Pfizer had a possible vaccine prior to the election but waited until Biden’s win to announce the trial effectiveness, but I digress. Maybe it’s just me, but it seems the good news is now coming in batches.
No matter the reason, my point here is that the market will do what it wants. It is an untamed animal that requires it be followed, not forecast.
Why Forecasting Doesn’t Work?
Have you noticed how many guests on CNBC are clamoring to give their market forecast? The reason is that it cost them nothing to do so, but if they are lucky enough to get it right, it could change their standing forever.
As I think back over time, I can remember a CNBC guest named Elaine Garzarelli. She was credited with calling the bottom of the 1982 and 1984 Bear Markets and the top of the 2000 Bull Market. However, where is she today? I don’t even know. You rarely see her anymore on any news channel. I can tell you it’s pretty hard to get the calls consistently right or we would hear more from or about her.
The constant flow of news and changing market conditions is what makes forecasting markets so tough. As an example, we have been using a service called Hedgeye to provide us fundamental data on global economies and the markets. The founder of this group is a pretty brash guy named Keith McCullough.
He and his group are constantly updating their subscribers on the economic quad that they believe the data is telling them that we are entering. Mr. McCullough bad mouths the Old Wall and investors who see the markets differently.
However, like Elaine Garzarelli before him, the constant change in the market narrative, the amount of market control now exercised by global Central Banks and the monetary policy (stimulus) that governments keep implementing has made their forecasts all but worthless. We recently cancelled our agreement with them as a result.
The Key to Success
We continue to believe the key to success is to follow the market until it tells you the trend is reversing. We call this Trend Following and it is something that is built into every portfolio we run.
It is not perfect, and we usually give up some upside and give back some profits waiting on the signals. However, it is a discipline and allows us to stay focused on the trend and not the short-term noise.
We like it for a number of reasons:
This latter point I believe is one of the most important. When the election approached, our models had us reduce exposure, which is good money management. However, those same models did not have us out of the market.
Now that the market is rallying again, we are participating in the rally and not sitting on the sidelines. Had some of the doom and gloom occurred that we mentioned previously, we would have limited downside risk.
We may now be underperforming on the upside as we look for the right time to possibly add back some exposure, but we did what our clients pay us to do and that is to “manage risk” first and foremost and generate positive returns as a secondary goal.
Maybe our process could help you? If so, please click here for a free consultation.
“Beware of wolves in sheep’s clothing” is a common quote that I would imagine that just about everyone has heard at least a few times during their lives. The saying goes all the way back to biblical times where Matthew warns believers to “Watch out for false prophets. They come to you in sheep’s clothing, but inwardly they are ferocious wolves. – Matthew 7:15.”
During the day, the religious elite used a series of expanding rules and regulations to ensnare the faithful, while in many cases disregarding or excepting out of those same rules.
Huh, what does that sound like today?
Wall Street Perfected Wolves in Sheep’s Clothing
Wall Street perfected the art of wearing sheep’s clothing! Never has there been a more ferocious group than the wolves of Wall Street.
A recent examples is its exemplary work to confuse retail investors over the issue “best interests.” Best interest is whether your advisor is looking out for your interest or his/her. Clue – it is supposed to be in your best interest.
As a registered investment advisor, it has been mandated for as many years as we have been advisors (and then some) that we must look out for the best interest of the client, even if it is not in our best interest. This is the way it should be!
On the flip side, commission-based broker and advisor competitors, regulated by FINRA under Rule 2111, have only had to meet a “suitability standard” for any investment or product that they might push your way. This suitability standard requires that the adviser or firm have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.
This standard is the rough equivalent of licking one’s finger and sticking it in the air to determine which direction the wind is blowing. It is inaccurate at best and highly suspect in its application, especially when a big sales commission is at stake. This is why there are shops today where the solution to every financial issue of their clients is an annuity or some other financial product. How can such narrow products be suitable for everyone? Clue – they are not!
Our industry has attempted to clean up this behavioral discrepancy between advisors, like us, and the average commission based broker or adviser, but even the best attempts to do so by the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) ended up as hollowed out versions of the originally proposed legislation after Wall Street’s lawyers and lobbyists got involved.
This has left the general public confused and allowed those same FINRA regulated brokers/advisors to hide behind fancy disclosures that proport to look out for your best interests but in reality are full of so many holes that they are really nothing more than a modified version of the suitability standard.
Wolves in the Multi-Family Office Space
Securities are just one element of what we do as a boutique, multi-family office. We provide a rather lengthy list of services to our clients, which are customized to each. Here are just a few of the more common services we provide in addition to wealth management:
These services are both technical and expensive to provide given the depth of knowledge required to provide such services.
However, in our bubble economy, the multi-family office has become all the rage and quite frankly our competitors, in most cases, are far better marketers. Family offices are popping up everywhere and multi-family offices are doing the same to handle the needs of those with significant wealth, but not so much as to justify a dedicated office and staff just for that family.
So naturally many advisors have seen this rise in interest for multi-family office services and have adjusted their business to meet this need. The problem is, just like our brokers friends, they are really nothing more than “wolves in sheep’s clothing.”
How do I know this? Because we deal with them every day.
Part of our competitive advantage is to say to the wealthy family that we can help you with family office services even if you would prefer others manage your investment assets. As a small firm, this has allowed us to grow and overcome an objection of being smaller, despite what I believe are substantial abilities in the area of investment management.
This position, as the trusted advisor, then allows us to see how the ultimate investment manager meets the client’s needs. In many cases, these investment managers likewise claim to provide family office services. I will let you in on a bit of a secret, they don’t!
They convince the family that they can do more than investment management and then mainly focus on the investment management while doing as little as possible to slide by on the family office side of the equation. These firms are nothing more than “wolves in sheep’s clothing,” deceiving the family while attempting to lock them into a relationship whereby the family feels they cannot effectively leave.
What is the solution? Naturally, it is to vet the firm harder and not be mesmerized by fancy marble flooring and expensive offices. I often find that the client believes “bigger is better” when in reality bigger equals impersonal, cookie cutter and bottom line driven.
May I suggest, smaller is better! Smaller in this space means intimate, boutique and a relationship that is more partnership and more family, than institutional. Isn’t that what families want? Next time, why not give smaller a try?
Let us know in the comments if you have had a “bigger is better” experience that maybe didn’t end up as expected