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Investment Strategy Update

July 7, 2014   |   News

An important step in our investment process is to regularly and critically analyze how our investment strategy is working. We continue to observe that sound critical analysis is being increasingly replaced by provocative media which have ratings as a primary agenda. To this end, we often find that they tend to over simplify and sensationalize the “logical” future direction of the markets. Too often we find that the pundits’ “logical” conclusions are usually wrong or lucky making them a poor replacement for a principled, systematic investment approach. We appreciate Gary Alexander of the Navellier mutual fund family’s candor in his reflection on 2013, “The year was far better than most pundits thought possible last January.”*

Let’s take a moment to reflect on some of our recent actions taken to the LifeGuide InSight portfolios and the resulting effects. Below is what we wrote in our last update on January 13, 2014:

“The large spread between asset classes provided us with a great opportunity to take advantage of rebalancing. Rebalancing is selling investments that have grown to a larger percentage than we started with and buying investments that have shrunk to a smaller percentage. This is a non-predictive way to sell what has done well and buy what is relatively cheaper. It also maintains the diversity we want. We rebalanced the accounts on Dec. 30 stand 31st.”

In response, we sold stocks which had done well and bought real estate and bonds, both of which were out of favor last year. The primary objective of rebalancing is to control risk by reducing asset classes that have become a larger part of the portfolio than intended. An additional benefit during volatile markets is the opportunity to sell high and buy low on a relative basis. This fortunately is what has happened so far this year resulting in added value. Unlike last year, stocks (see blue line below) have trailed by Real Estate (red), TIPS (yellow), and Treasury bonds (green). Since we sold stocks and bought Real Estate, TIPS, and Bonds, the rebalance has boosted the portfolio’s return. 

Finance article

Additionally, we said the following in our January communication:

“Since it is uncertain what the world will bring this year and which investments will be this year’s winners, it is prudent to hold a collection of different types of investments that complement each other in a wide variety of possible outcomes. We have investments for growth (U.S. stocks, International stocks, Emerging stocks), investments to hold up under inflation (Real Estate, Inflation protected bonds), and investments to protect against economic decline (bonds). Since the InSight accounts are a compilation of these asset classes, the return is going to be the weighted average return of these holdings. Some of the holdings will do much better than the portfolio return (for example US stocks in 2013) and some will do worse (Inflation protected bonds [TIPS] – in 2013).”

Another one of our investment principles is to maintain meaningful diversity in your portfolio. It takes resolve in years like 2013 to not chase yesterday’s winner when the recent return of the portfolio is lagging the high flying asset class for the year. Fortunately, our resolve is being rewarded this year. We have seen the benefit of not increasing our stock allocation and diversifying the traditional “60% stocks/40% bond” portfolio. Many traditional portfolios do not have a meaningful allocation to Real Estate. They tend to split the difference between stocks and bonds. Year to date (1/1/14 -5/13/14) our Real Estate holding has performed 11.94% better than stocks and 12.23% better than the benchmark US corporate bond index exchange traded fund, AGG.

In 2013, we upgraded the real estate holding from iShare’s ICF to Vanguard’s VNQ. We made the switch because VNQ has lower expenses (0.10% compared to 0.35%) and is more diverse with 131 holdings as compared to 30. Whenever a fund switch happens you are always subject to short term relative price under and over valuations. In hindsight, it appears ICF was undervalued compared to VNQ resulting in a better return in the short term for ICF so far this year than VNQ (16.21% compared to 14.41%). We still feel the lower fees of VNQ and broader diversity make it a more attractive long term real estate holding for the portfolio.

Some further updates:
• In an effort to provide you with better reporting and us a more effective trading platform, our Broker-Dealer, ProEquities, has upgraded their systems. You will notice a change in your performance reports beginning this quarter or next. You will also have access to a new website to view your accounts online. Please let us know what you think. If you have any questions or concerns, don’t hesitate to contact us.
• We have launched our new LifeGuide InSight 1.5x portfolios! InSight 1.5x are more aggressive versions of our Core InSight portfolios. They follow the same principles and methodology as our InSight Core with the potential for higher growth and volatility. Please contact us if you would like more information about this exciting expansion to the InSight portfolios.
• For our clients that are invested in our values based portfolios:
o We have been able to reduce your costs by transitioning your TIAA stock and Bond holdings to their Institutional holdings.
o PAX World executed a fund merger. The new fund is now Pax MSCI International ESG Index Institutional share class.

The markets have unfolded in an exciting way for our LifeGuide InSight portfolios since our communication in January. They continue to reinforce the value of a principled investment strategy and process. One thing that we know is that markets will always be in a constant state of change. We will continue to apply our disciplined investment approach aimed at helping you achieve your long term success.

As always, please let us know your thoughts, concerns, and questions.

We appreciate your trust and we are here for you.

Zak Lutz, for the entire LifeGuide team.


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