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ACTING on the Situation

October 29, 2014   |   News

Thank you for the many great responses to our PIMCO communication.  Your comments and question remind us that we need to do a better job of making you aware of the work that we continue to do for you behind the scenes.  The collective minds of your LifeGuide team are constantly thinking about helping you achieve your definition of success.     

So what is going on in the market?      

The market has been on a roller-coaster for the last month and a half.  US stocks were up over 8% for the year by mid-September then they gave that all back by Oct. 15th.  Since Oct. 16th US stocks have sharply recovered about 5%.  Real estate was up over 20% went down to 11% and is now back up to 19%.  But why? Concerns over an economic slowdown in Europe and the ending of the Fed’s monetary easing sent the markets lower.  Better than expected corporate profits along with improving unemployment numbers triggered the rebound.   

 

So what actions is your LifeGuide team taking? 

  

It is easy to make costly missteps when the market is volatile.  Aided by the media outlets striving to sell advertising, it is easy for the fear or greed switch to turn on.   Your brain starts to extrapolate to worst or best case scenarios. The “What ifs” begin to start.  

  • What if the market drops another 10% or 20%? 
  • What if the market keeps going up and up?
  • What if Europe, China or Japan tanks? 
  • What if hyper-inflation kicks in? 
  • What if  … fill in the blank.    

This is where we feel that it’s helpful to turn to LifeGuide’s Investing Principles to provide perspective and guide your actions.  Our principles help you (and us) avoid anxiety and harmful investing behavior.

We would like to highlight two of LifeGuide’s principles that we feel are especially in play right now.

First, creating and maintaining meaningful diversity in your account usually helps in times of market swings.  This year to date performance chart of our InSight model illustrates this well.  Real estate is up almost 19% year to date while international stocks are down almost 8%.  Since you don’t know ahead of time which will do well and which will not, the best plan is to spread it around.  As Dave Ramsey says, “Money is like manure: Pile it up and it stinks, spread it around and it’ll grow stuff.”  

 

Second, be contrarian or more clearly said, sell high and buy low.   We accomplish this in our LifeGuide InSight portfolios by practicing dynamic rebalancing.  Rebalancing is the process of capturing the winnings from investments that have grown in your account (selling high) and buying those that have dropped in value (buying low.)  Most people don’t regularly rebalance their accounts because they have gone down the fear and greed rabbit trails.  Those that do rebalance tend to do so sporadically or at defined time intervals such as annually, semi-annually, or quarterly.  We feel that dynamic rebalancing is a better way.  We trigger rebalances by setting collars or ranges for each investment.  For example, if we want a 30% allocation to US stocks, we will set the target of 30% and a surrounding collar of say 3%.  So, if US stocks go above 33% or below 27%, we will either sell or buy to get back within the desired range.  In volatile markets, this can trigger rebalances when they provide the most value.  We monitor and trade each InSight account on a weekly basis.  As you have probably noticed by your trade confirmations, we have been executing a lot of trades over the past few weeks.  Volatility can work in your favor if you buy the dips and sell the peaks.

Careful thought must go into the setting of these target allocations and collars.   Markets exhibit momentum.  We want to benefit from this momentum but also keep the portfolio balanced.   When managing taxable accounts, we don’t want to set collars too tightly so that we can avoid realizing unnecessary taxable gains.  Ah, but that is why you have us.  We love thinking about this stuff!

We are teachers at heart.  We feel part of our mission is to share what we have learned to help make you better investors.  

Thank you for your ongoing trust and business.  Our team works hard every day to continually earn it.   As always, never hesitate to contact us with your questions or comments.

Disclosure: Investment in securities involves risk and possible loss of principle. No particular investment strategy is guaranteed to prevent a decrease in portfolio value.

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