After a difficult 2008, the model portfolios we manage at Wade Financial Group, Inc. (WFG) thus far have had an exceptional 2009. Across our various strategies, we are on average significantly ahead of our benchmarks. Below you will find a sampling of results as of 7/24/09:
Portfolio | 2009 Results as of 7/24/09 |
Benchmarks | |
Schwab Money Market | 0.2% |
Barclays Cap. Agg. Bond Index | 2.6% |
S&P 500 Index | 10.0% |
50/50 Mix Barclays C.A. Bond/S&P 500 | 6.7% |
Wade Investments Portfolios | |
WI CA Bond | 16.1% |
WI AA/TRA | 14.3% |
WI DCS Balanced | 15.5% |
WADEX Fund | 8.7% |
WI AP-AIA | 14.9% |
WI CA U.S. Stock | 10.0% |
WI CA Global Stock | 16.5% |
From its March low, the S&P 500 index has jumped a whopping 44.7% as of 7/24/09. Over the past month, world stock markets experienced an approximate 10% correction, just to battle back to 2009 highs as of last Friday.
Despite the growing consensus view that the U.S. is coming out of the recession, I am suspicious of the “glow” that too many prognosticators are placing on the potential pending economic recovery. There is only so much cost cutting and layoffs that corporations can do to improve their earnings. With more layoffs coming, a real estate/liquidity market that has yet to fully unthaw, a still tapped out consumer, trillion dollar budget deficits and probable tax increases, it is hard to buy into the “recovery glow” forecast.
Contrarian Investing
It was in March of this year that all of the above numbers in the table (except money markets and bonds) were seriously in the negative. Many investors got scared, sold their stock investments and parked the proceeds in a money market account. Please notice the return of 0.2% thus far in 2009 for the Schwab Money Market account. We stuck to our guns and remained invested for what we felt would be an explosive recovery that did indeed happen (44.7%). After these attractive returns that we have achieved for our clients thus far in 2009, prudence dictates that it is now time to “take some chips” off the table. The following moves have taken place this week:
Portfolio | Prior Stock Exposure | New Stock Exposure |
WI AA/TRA | 65% | 56% |
WI DCS Balanced | 54% | 51% |
WADEX Fund | 55% | 49% |
WI AP-AIA | 50% | 40% |
WI CA U.S. Stock | 88% | 88% |
WI CA Global Stock | 91% | 91% |
The sale proceeds from the reduction in stock exposure have gone to three areas:
- Cash
- Managed Commodity Futures
- Managed Foreign Currency Futures
You may recall that in 2008, the Managed Futures asset class was one of the few that actually made money, other than Cash and U.S. Treasury bonds. We like Managed Futures because of the low historic correlation to stocks. To speak in plain English, low correlation means that when one asset category “zigs” the other “zags”. True to form, while Managed Futures did well in 2008, the category has lost approximately 5-10% thus far in 2009. We think that it now makes sense to sell stocks that have gone up 44% (or 60% for Emerging Markets) and reallocate the proceeds to a category that we feel can do well if the stock market experiences another significant downturn, of which, can happen at any time!
Preview of Coming Attractions
I have spent the past two weeks performing an exhaustive analysis of the “low correlation” investment thesis. The challenge to the strategy is that history does not always repeat itself.
- In 2008, the benefits of diversification into asset classes that had historically offered the “reduced correlation effect” all but evaporated.
- The challenge is ongoing in regards to how to mix the “investment soup” so that it results in the desired pleasing taste (avoidance of steep losses).
- The soup tasted bad in 2008 and we are applying significant resources to reorient our portfolios moving forward so that the severity of 2008 it not on the menu in the future.
Within the next month we will unveil a “reengineered” approach to portfolio management that will place the focus sternly on what we believe will be an improved approach to the preservation of capital across future economic storms.
Investing lesson:
Moving to an “all cash” position, as many self-directed investors did at the beginning of 2009, ruined any chance these investors had of recouping losses experienced in 2008. It never makes sense to make all or nothing bets on the direction of the stock market. Congratulations to all readers of this blog that did not fall prey to the temptation of “selling at the bottom”.
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