To Inform:

Tuesday, March 18 at 5pm we will hold our semi-annual “Questions from a Hat” Portfolios and Pints event at Crooked Can in Hilliard. These events are always fun, but I feel like attendance is always a little higher when there is volatility in the market…and right now we are definitely seeing market volatility. If you have questions, want to know how we are positioning portfolios, or are simply looking for some good food and entertainment – we invite you to come. And please bring a friend!

Alex Durbin and I have been compiling questions clients have been sending in and it is clear we have no shortage of topics to cover. Questions regarding tariffs, trade wars, foreign stocks, historical market pullbacks, and interest rates are already in our green Day After St. Patrick’s Day hat, and I know there will be more to come.

As we look toward Tuesday, I want to gear this “To inform” portion of WealthNotes on one question in particular we have received:

“I would like to know how The Joseph Group is managing portfolios in this period of extreme uncertainty.”

This question hits at the heart of our investment approach, and while we could talk all night about this topic, I want to hit on three fundamental concepts:

Investing toward objectives is essential and when done correctly, can provide peace of mind.

The foundation of every successful financial plan is identifying the various objectives the plan is seeking to achieve. In effort to simplify, clarify, and speak the same language as our clients, we have identified four key building blocks which stack together in different ways to form the unique foundation of a client’s financial plan:

• PROTECT – objective is to have funds which are safe, liquid, and there when you need them
• PROVIDE – objective is to provide cash flow and/or a sustainable stream of regular withdrawals to support spending
• GROW – objective is to provide long-term growth of capital while keeping an eye toward reducing drawdowns and volatility
• ASPIRE – objective is to achieve longer-term, undefined goals, and/or address intangible or emotional goals.

A client’s situation is not just one of these building blocks – it is some combination of two, three, or maybe all four stacked together in different ways to form the foundation of a client’s investment plan.

 

Once we have identified the building blocks, each of the portfolios we have the privilege of managing for clients is tied to one of these objectives. Our Investment Strategy Team isn’t necessarily trying to make the next great prognostication of what the market will do next – instead we are trying to figure out how what is happening in the market allows us to maximize the opportunity to meet the objective over time.

For example, Provision, our name for the strategy for clients seeking to meet the Provide objective is heavily invested in bonds and dividend paying stocks and has held up much better than the major market indexes in recent weeks.

When clients truly understand how different parts of their portfolio are designed to do different things in different market environments but still roll up into a cohesive overall financial plan, the peace of mind achieved is powerful.

Asset Allocation and Diversification Means Portfolios are NOT the S&P 500.

When a narrow segment of technology stocks are driving market returns (like last year) it can be difficult to explain diversification and the fact an overall portfolio is not going to look like the S&P 500.

When those same technology stocks are leading the market lower, but other asset classes are holding up on a relative basis, it can be a WONDERFUL time to explain diversification and the fact an overall portfolio is not going to look like the S&P 500.

We are in the second environment right now and believe it or not, we are having terrific conversations.

Many of the portfolios we have the privilege of managing for clients are diversified across five main asset classes. Let’s take a look at what is going on across these asset classes in the current environment.

 

• High Quality Fixed Income or Bonds are providing ballast in the current environment. A mainstream index tracking the high-quality bond market is paying an annual interest rate of about 4.5%, and is up over +2% year-to-date through March 13.
• Credit, or Junk Bonds have a little more risk, but are paying annual interest rates in the 6.5% to 7.5% range. A mainstream index tracking the junk bond market is up about +1% year-to-date through March 13.
• Stocks are where the action is, but not all stocks are moving the same way. I’ll explain:
  • The S&P 500 index of the 500 largest U.S. stocks has pulled back about -10% from its February highs and is now down about -6% year-to-date through March 13.
  • High dividend paying U.S. stocks are holding up better than the overall U.S. stock market in recent weeks. As I type, the S&P 500 is down about -1% today, but an index of high dividend paying stocks we follow is only down -0.3% on the day, and is actually positive year-to-date.
  • Foreign stocks are actually performing well in recent weeks – an index tracking the rest of the world outside of the United States is up +6% YTD through March 13.

• Real Assets include things like commodities (think oil, wheat, corn), real estate investment trusts, and infrastructure (think cell towers, oil pipeline, and data centers). When we look at indexes covering these various components, all of them are flat to positive year-to-date through March 13.

• Dynamic is an area where we hold funds which use unique strategies which seek to “zig when the market zags” and provide addition diversification to portfolios. One fund in particular owns stocks in combination with options and seeks to provide protection if the market declines more than 5% within a quarter. Owning a “hedged stock” strategy such as this is a way for part of the portfolio to automatically become more conservative in the event of a significant market decline.

The bottom line – the mainstream U.S. stock market is getting all the tariff headlines, but not all asset classes are acting like U.S. stocks, which is good news for investors.

Volatility Is Your Friend When Putting Money in, It’s Your Enemy When Taking Money Out.

One of my favorite investment quotes is from long time investor, Shelby Cullom Davis who said, “you make most of your money in a bear market, you just don’t realize it at the time.”

Davis knew that a down market may not feel good, but it offers an opportunity to buy stocks cheap. Earlier this week, I helped a client change where his “new” 401(k) dollars are being invested within his plan. We made sure new dollars were invested aggressively in stocks to take advantage of the fact that when markets are volatile, he is structurally set up to buy more shares at lower prices.

Volatility in markets can help investors in 401(k) plans or other accounts where the investors contributing funds over time because they are systematically buying more shares at lower prices.

The opposite is true however, for investors in the withdrawal phase…we want to use strategies which can reign in volatility when investors are taking money out of their accounts to preserve capital and support a sustainable withdrawal rate.

As we’ve looked at markets in recent days, a stock market which looks like it is having a great day at 3pm can turn into a bad day by 4pm (and vice versa). Uncertainty is part of investing in markets, and we are seeing a lot of uncertainty in recent weeks.

When we do our work well, the one thing we can be certain about is the objectives our clients are seeking to achieve. And when we combine that knowledge of objectives and apply sound principles around asset class diversification and volatility management, our hope is clients can have long-term peace of mind regardless of what is happening in the markets.

All of that said, market changes due to tariffs, interest rates, currencies, and valuations create opportunities to manage risk and seek future gains. Please join us on Tuesday, March 18 at 5pm at Crooked Can in Hilliard as we pull questions out of the Irish hat and dive into the details.

 

 

 

 

Written by Travis Upton, Partner and Chief Executive Officer