Portfolio Strategy Review Q2 2017

by | Jul 15, 2017 | Portfolio Strategy

 5:59am “OK campers rise and shine……the question on everybody’s lips is….”

 ……do you think the US market is in bubble territory?

Feels like Groundhog Day as US stock markets keep rising. Record highs occur almost daily.  Expensive stocks keep getting more expensive as the 2nd longest bull market in history is now over 8 years old. Large cap growth stocks, namely the FANGs (Facebook, Amazon, Netflix, Google) are leading the charge. Can this rise continue in the face of high valuations and tepid overall economic growth?

Asset Class Review

Over the past year, international stock markets across all three benchmarks we track delivered better returns than the S&P 500. The risk-reward tradeoff for international remains positive due to their attractive valuation. And though the US has outperformed international markets for the past 3, 5, and 10 years, using history as our less than perfect guide, this pattern is due to shift.

Interest rate sensitive REIT and bond returns were muted but are still down year over year as many believe rates are due to rise, though long-term rates have recently receded. Commodity returns continue to struggle, mostly due to oil overcapacity – which typically is a cyclical phenomenon. However, US shale oil production may have permanently changed the global supply/demand equation in this market. Indeed, Saudi Arabia which heavily depends on the price of oil is taking unprecedented actions. Its state-owned oil company, Saudi Aramco which funds 60% of the national budget, is planning an IPO for next year, while its newly appointed crown prince attempts to restructure its highly socialized economy.

How to Address the Big Question?

If we are in a bubble, what to do about it? Many astute investors are concerned about lofty valuations and fear a correction is just around the corner. Is there a safe way to sidestep the downside and capture the upside? Unlike Phil Connors (Bill Murray), we don’t get multiple do-overs to get it right.

Case Study: A Prediction is One-Thing, Timing Another

Bob Rodriguez was a very good money manager who won several awards as both a bond and stock money manager. He predicted the market meltdowns of 2000-02 and 2008-09. Now retired, Rodriquez believes we are headed for another major correction due to Central Bank policies that have artificially distorted market pricing mechanisms with low interest-rate stimulus. Let’s examine some facts.

In 1998, Rodriguez increased cash to 30% in his FPA Capital mutual fund to “protect principal.” Half his clients left, preferring to stay fully invested in the froth of the “new economy.” Prior to 2008-09, he raised cash to 45%. His economic analysis, valuation discipline, and market predictions were ultimately correct. On that score, he ranks well above most active money managers. To what result?

Rodriguez’ fund, FPA Capital, underperformed its benchmark index in those periods when he raised cash levels (1998-00; 2003-07). Bad timing. When the downturns came, the cash provided a buffer to reinvest that enabled outperformance over short time periods (2000-03; 2007-09). Good timing. The longer-term reality, consistent with over 80 years of performance studies, is that his fund underperformed his benchmark index. The compounded 0.9% difference from 1998-2016, means about 18% of lost principal – that is not consistent with principal protection.

Tactical Guesswork vs. Strategic Perspective

As illustrated above you must be right twice: once on direction; once on timing to have a chance to outperform. There’s no proven, sustainable way to do that and the odds are highly against it (by a factor of over 2:1). Though there are countless, erudite sales pitches that claim tactical ways to reduce risk and achieve better returns. None has been able to withstand the test of time. Timing the market is a losing game.

Getting the right strategic mix of assets in your portfolio is a vital decision in helping you to best achieve your goals. How much risk can you afford to take vs. how much risk are you comfortable taking? Various factors will inform your perspective and your time horizon is always a key factor to consider. A strategic framework tailored to your goals clarifies your decision-making against market ups and downs, helps you safeguard your key concerns, and will instill confidence that you are moving in the right direction.


Planning for a secure retirement requires effective investing and thoughtful financial planning. To discuss ways to help you achieve even stronger financial outcomes email jerry@compoundvalue.com.

Sources: Morningstar, The Economist

PLEASE NOTE: You can’t invest directly in an index. Past performance does not guarantee future performance. All investments are subject to risk, including possible loss of the money you invest. Diversification does not guarantee profit or protect against a loss. Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. For details please see Disclosure.

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