Tag: Portfolio Management

Why, When, and How to Rebalance Your Portfolio 

Posted on by phoffman@channelchek.com

There are More Reasons to Balance Your Investments than to Let Them Ride

Performance differences of varied allocations in an investment portfolio over time will disrupt the original balance. It doesn’t take long for the portfolio to be overweighted in some sectors and underweighted in others. This can add unintended risk not included in the original plan. One tried and true method of resetting the risk to its original setting, is regular portfolio rebalancing. Below, we’ll highlight why investors rebalance their portfolios, how to know how often is prudent, and the importance of reviewing and maybe revising allocations during the rebalancing process.

Why Do Investors Rebalance Their Portfolios?

Rebalancing helps to retain the characteristics of a decided upon asset allocation. This enforces the mix in sot not veering too far from an allocation that takes into consideration the expected risk adjusted return characteristics of the portfolio, and supports the individuals investment policy statement (IPS)

Asset allocation refers to the distribution of investments across different asset classes, such as stocks, bonds, crypto, real estate and cash. A well thought out portfolio may also consider market capitalization of the securities in the stock portion of their investments as these too have different performance characteristics.

Over time, market movements cause the value of the portfolio assets to fluctuate, as one segment grows faster, or loses value faster than other assets. This unbalances the original asset allocation. Because this is portfolios lose their balance, investors will mark their calendars to, at set intervals, rebalance their portfolios to bring it back in line with the intended allocation.

Bringing a portfolio back to the original decided upon helps with two main important goals.

Risk Management: Different asset classes carry varying levels of risk. By rebalancing, investors can ensure that their portfolios remain aligned with their risk tolerance. For instance, if stocks have performed exceptionally well, their increased value could lead to a higher proportion in the portfolio. Rebalancing allows investors to sell some stocks and allocate the proceeds to other assets to manage risk effectively. Over time this can have the effect of selling off securities as they become overvalued, and buying others when they are undervalued.

Long-Term Strategy: Regular rebalancing forces investors to maintain their long-term investment strategy. It prevents the portfolio from becoming overly skewed towards one asset class, which could result in excessive exposure to specific market conditions. Regularly rebalancing ensures that the investment strategy remains intact, even during periods of market volatility.

How Often Should Investors Rebalance Their Portfolios

The frequency of portfolio rebalancing depends on individual preferences, investment goals, and market conditions. While there’s no one-size-fits-all approach, common rebalancing strategies include:

Time-Based: Investors can rebalance their portfolios on a predetermined schedule, such as quarterly, semi-annually, or annually. This approach ensures regular monitoring and adjustment of the portfolio.

Threshold-Based: Investors can set predetermined thresholds for asset allocation. When the allocation deviates beyond these thresholds, rebalancing is triggered. For example, if the target allocation for large-cap stocks is 30% and it exceed 35%, the entire portfolio would be rebalanced to the original desired mix.

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Reviewing Allocation Changes when Rebalancing

Isn’t selling your winners and increasing your losers a bad strategy? When rebalancing a portfolio, investors should review and carefully consider allocation changes. This is risky because the purpose of rebalancing and doing it at set trigger points is to make sure emotion doesn’t prevent the investor from thinking that a particular allocation will rise, fall, or move sideways forever. If one is reviewing changes to the allocation, they should start with their stated investment objectives and assess the performance and expectations of each asset class against the objectives.

Key points to consider include:

Diversification: Rebalancing presents an opportunity to reassess the diversification of the portfolio. Ensure that investments are spread across multiple sectors, regions, or asset types to mitigate risks associated with concentration.

Investment Objectives: Investors should review whether their investment objectives have changed over time. If so, they may need to adjust their target asset allocation accordingly. If the portfolio is retirement money, as one approaches retirement, conventional wisdom suggests they should reduce assets that expose them to the most uncertain returns.

Market Conditions: Assess the performance and outlook of different market-caps, industries, and overall asset classes. For example, if rates are expected to rise, reducing the weighting in dividend stocks could be a historically-supported wise decision. Allocate resources to areas that demonstrate growth potential while considering expected risk factors.

Take Away

Time-tested wisdom says investors should, at regular intervals or triggers, rebalance their investment portfolio. This helps them take some profits and invest in securities that haven’t yet risen, or perhaps have gotten cheaper.

By rebalancing, investors can manage risk, align their portfolios with their investment goals, and prevent overexposure to assets that have already had their big run and may be ready to retrace their rise. The frequency of rebalancing should be based on individual circumstances and preferences, while careful review and consideration of allocation changes are crucial for optimal portfolio management. Regularly monitoring and adjusting portfolios through rebalancing can help

Paul Hoffman

Managing Editor, Channelchek

What Investors in Stocks Can Learn from Index Investors

Posted on by phoffman@channelchek.com

Why Aggregate Portfolio Return is More Important than Any Single Holding

Have you ever agonized over a stock in your portfolio that is not performing as you had hoped? While it’s the nature of investing to not bat 1000, it can be hard not to think of the decision to have bought it as a mistake. It probably isn’t. Here is a better way to look at it that uses a recent example (June 1, 2023).

On the first day of June, investors in the Nasdaq 100 (NDX) found themselves up 1.17%. That’s a decent run in one day, and since they are focused on the indexed fund that they are invested in as one investment (not 100), they are content and confident.

But what if they owned the underlying 100 stocks in the fund instead? They might be kicking themselves for having bought Lucid (LCID), or 22 other holdings that are down. Using Lucid as an example, it is lower by 15.6% (June 1); the day before it closed at $7.76, and it is only worth $6.55 today.

Ouch? Or no big deal?

The overall blend of the portfolio is up, yet at the same time, 23 holdings are down – no big deal – this is the way portfolio investing works. In fact ten of the stocks in the NDX declined by more than the 1.17% the overall portfolio is up. Most index fund investors just look at one number and don’t look under the hood for reasons to feel remorse (or glee).

Aggregate Return

There are many reasons investors, even professional financial advisors, avoid building a portfolio with individual stocks, but choose index funds. One is not taking responsibility. If you own, or if an investment manager buys a mix of stocks that are in total up a respectable amount, yet some are underperformers, laggards and drags on the overall portfolio performance, there is a feeling of responsibility for the holdings that are down, the dollar amount lost, and the drag on return that is staring them in the face possibly causing sleepless nights.

On this one day, almost 25% of the Nasdaq 100 was down while the index was up 1.17%. The biggest gainer, PDD Holdings (PDD), is only up by half the percentage of LCID’s is selloff. Yet those looking at the aggregate return and not individual return are feeling mighty good about themselves. And that’s good.

If you hold a portfolio of stocks and did your research, whether it be fundamental analysis, technical analysis, industry trends, etc., and understand why every stock is in your portfolio, you could easily be better off if you learn not to agonize over losers. The returns in most of the last five years in index funds have come because of the weighting of the stocks that have gained, not by having more winners. It has become normal for an index that is up on the year to have been carried by just a dozen or so stocks that are in the mix.

Don’t Undermine Your Portfolio

Investors can negatively impact their performance by focusing too much on one stock. When this happens, they can make bad decisions, some of these decisions might be pain-related, others ego, either way, rational decisions are based on investment probabilities, not human emotions, or overthinking; these can ruin good decisions that would have led to improved returns.

Other investors undermine their portfolio differently, by not wanting the responsibility. They buy the index, and they are done – its out of their hands. If average returns are their goal, they’ve succeeded. Or if they are a financial professional and separating themselves from responsibility is the objective, index funds allow them to blame “the market”; it isn’t their fault – they have succeeded.

If an investor can overcome both of these, they can manage their own holdings and be as or more content than an index fund investor. If they follow good portfolio management strategies including, diversification, analysis, research, etc., and then mainly focus on aggregate return, they can make bette decisions and lose less sleep. Individual stocks don’t matter as much when you are purposeful when choosing holdings. Most large indexed funds aren’t purposeful, they aren’t intended to be investments, there makeup is formulaic and meant to mimic the market, not provide stellar returns.  

Take Away

No investor bats 1000. Even top portfolios may have more losers than winners, the key is to have bigger winners and not overreact or over focus on a few holdings. For investors, a portfolio of individual companies can lead to more mental highs and lows as each stock is a personal decision with great expectations. Avoid this by thinking differently. If those one or two stocks don’t perform as expected, think of all the down stocks in all the index funds that the owners aren’t even paying attention to. All these investors are looking at is one number, aggregate return on all the holdings. Maybe you should too.

Paul Hoffman

Managing Editor, Channelchek

Source

Nasdaq Market Activity

How Family Offices are Reallocating Portfolios

Posted on by phoffman@channelchek.com

A New Report Indicates How the Uber Wealthy Have Adjusted Investments

What are the uber-wealthy investing in? Goldman Sachs just released its annual Family Office Investment Insight Report titled Eyes on the Horizon. The report presents the perspectives of 166 investment decision-makers at family offices. This is interesting because the still turbulent investment climate has shifted dramatically over 12 months, and comparisons of family office (FO) portfolio construction with last year indicate the mindset of the FOs they entrust to implement large investment portfolios.  

Who was Surveyed

A family office is a private wealth management firm that provides investment management, financial planning, tax and estate planning, and other services to ultra-high-net-worth families. Family offices are typically set up by families with assets of at least $100 million.

The Goldman report pulls information from FOs across the globe. It includes 57% in the Americas, 21% in Europe, and 22% in Asia-Pacific. Within the survey, 72% reported a net worth in excess of a billion.

What was Discovered

Family offices continue to concentrate on secular growth themes that could withstand economic cycles and create value over time: Worldwide, 43% of FOs believe that information technology is overweighted in their holdings, 34% of family offices plan to lighten up on healthcare.

Family offices still allocate a significant amount of money to alternatives. Of their average holdings 44% are made up of real estate, infrastructure, hedge funds, and private credit. While the markets are different behaving differently, the long-term view held by most is that they intend to roughly maintain their allocations over the next 12 months. The average allocation to private equity increased from 24% to 26%, compare this against the public market allocation, which declined from 31% to 28%.

For those that anticipate larger reallocations, several family offices anticipate expanding their investments in private credit, private real estate, and private infrastructure.

The hold-the-course mindset, focusing on long-term growth themes, also applies to geographic allocations, with a strong focus on U.S. markets. The U.S. represents 63%, and “other developed nations” average 21% of holdings. Interestingly, the report reveals that 41% of Asia Pacific offices included in the report expect to increase allocations to the U.S. in the next 12 months.

Despite the high inflation being experienced globally, 12% of portfolios are in cash and cash equivalents. This capital is expected to be deployed in non-cash investments by 35% of the respondents.

One clue as to where this may go is the finding that 39% of family offices plan to up their allocation in fixed income. In comparison to the start of last year, yields on fixed income investments are currently much higher.

In the category of digital assets, both cryptocurrencies and other blockchain-derived financial investments, 32% of FOs are currently invested here. This is a much deeper plunge into this asset class than had been reported in 2021 when just 16% held cryptocurrencies. However, a large portion is still uninvested in digital assets, and they don’t expect to be over the coming 12 months. This percentage of uninvested in digital assets that don’t intend to be has jumped from 39% to 62%. Those that had replied a year earlier that they might be interested in digital in the coming year was much higher at 45%. The current survey now has that expectation at 12%.

A full 42% of family offices don’t use traditional investment leverage.

Actual Change in Allocation

Source: Eyes on the Horizon

According to the Goldman Sachs report, providing venture capital is a popular among family offices worldwide. The lowest percentage of family offices with VC investments are from Europe, this compares with 86% in the Americas, and 91 in Asia Pacific.

Looking Forward

Private credit is a small part of the average family office portfolio at only 3%. What is noteworthy is that 30% of respondents said they expect to increase their allocation here in the next year. One reason this may be attractive to them is that the rates paid on these arrangements typically resets as interest rates move up or down.

“Sustainable” investments, particularly carbon transition related holdings, account for 39% of respondents that are focused on sustainable strategic investments. Among these, 48% invest directly in companies that they expect will have a positive environmental impact. The regulatory climate provides tailwinds for this investment category.

Expected Change in Allocation (Future)

Source: Eyes on the Horizon

Family office allocation to alternative investments is higher than the average household. The long-term time horizon, due diligence capabilities, and lower liquidity needs makes the higher allocation unsurprising. The turbulent economic environment has, for some, made this asset class more compelling. Private markets have been characterized by historically higher returns with less specific valuation changes.

Take Away

Family offices are private wealth management firms that provide customized services to ultra-high-net-worth families. Reviewing how teams of financial and investment professionals shift allocations at FOs is worth reviewing for a number of reasons. Chief among them is they control large sums of cash, so opportunities they are moving out of or into can help solidify market trends. There is also, of course, the tendency for investors to look a little closer when they see a professional or successful investor involved. This can at times, provide seeds for ideas on what to do within one’s own portfolio.

Some of the investments used by family offices require one to be an accredited investor. Do you know if you’re considered by the SEC as an accredited investor, one good way to know is by clicking here to get answers.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.gsam.com/content/dam/pwm/direct-links/us/en/PDF/onegs_familyoffice_eyesonthehorizon.pdf?sa=n&rd=n

The Coming Market Hiccups, What’s Your Strategy?

Posted on by aweinsoff@channelchek.com
Image Credit: Mateusz Dach(Pexels)

Planning for a Changing Market Environment is Not Without Risks

There are two upcoming events, one scheduled and one not. They each have the potential and perhaps are even likely, to jolt or shift financial markets for a period longer than the ordinary disruptions traders and investors experience over the course of any month. These two items are the U.S. elections, which are approaching quickly, and a resolution of the Russia and Ukraine war.

Mid-Terms

On the U.S. side of the Atlantic, the mid-term election is thought of as a referendum on the person in the Oval Office and their party. The democrats who are in power in both legislative branches and also hold the executive branch are likely to lose the House and perhaps the Senate. The gridlock that would unfold if this occurs would include many government spending plans that have helped drive some investment sectors since January 2021. However, the party currently controlling both are viewed by many market participants as not “Wall Street-friendly,” so this could also weigh into market direction. And just as critical for investors, it would have the ability to shift which sectors are winners and which investments one may wish to lighten up in.

European War

In Europe, the war means a lot of things to those that live there. Focusing only from a global investor standpoint, one’s mind first turns to the energy sector. If the outcome is one where Russia largely has its way and annexes a large portion of Ukraine, how long would it take for normalcy to resume? And what would that look like? If, instead, Putin, who is leading the charge, loses power or his resolve, what would this mean for stocks, commodity prices, and overall investor mood? Should investors pre-think all scenarios and have a plan for each?

What Investment Experts Say

Channelchek spoke to a couple of highly respected, highly credentialed money managers and investment experts and asked about pre-planning.

Eric Lutton, CFA is Chief Investment Officer, at Sound Income Strategies. Eric doesn’t expect Putin to be removed, but cautions that if he is, depending on what follows, it may not automatically be good for markets. He said, “If Putin was “pushed” out of power,  a highly unlikely scenario, but if it were to happen, it would mean more unknowns for the market, which would probably be taken as another negative.” Lutton, who has spent a great deal of time in Russia and Northern Europe, explains,  “A vacuum of power in Russia would not be a good thing and could escalate the current situation.” Eric believes if a leader chosen by the West was installed, “inflation would fall, and the Fed could ease up on the rate increases.” Lutton does not think that is a scenario we will see any time soon.

The Sound Income Strategies CIO thinks the media overplays any real risk of Putin dropping a nuclear device so close to Russia on land it seeks to annex. But he did entertain the thought, as I pressured him for hypothetical scenario analysis and investment planning thoughts. “As for investors, if a bomb falls, either Putin or a false flag operation, you’d want to be in 100% cash! No place would be safe other than perhaps a handful of industrial defense or war contractors,” Said Eric Lutton.

As it relates to the November 8th mid-term elections, Eric Lutton isn’t expecting a huge “red wave” win. He points to the notion that there are people that would avoid voting red even if it was clear that the policies would better serve the populace.   Eric does, however expect Republicans to gain a majority in the House and Senate. Even if they only gain a majority in one branch, Lutton says, “I do think there will be a slight pop in the market, but short-lived as the main factors will be the Fed, inflation, supply chain and ongoing conflict in Ukraine.”

Robert Johnson, PhD, CFA, CAIA, is the CEO and Chair at Economic Index Associates. He apologetically offered conventional wisdom, suggesting that it could be a mistake for investors to, “…concern themselves with broad market moves or the crisis du jour.” Johnson, instead, recommends more tried and true portfolio implementation. This includes suggesting the creation of an Investment Policy Statement (IPS). Dr. Johnson explains that clearly defining, in advance, and in accordance with one’s time horizon and other specifics, such as liquidity needs and tax situation, will define the ground rules necessary during temporary hiccups in the market.

As it relates to a personal investment policy statement, the Chair of Economic Index Associates says it is best to develop a policy statement in calm, less volatile markets. He says’ “The whole point of an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations.” He did allow for individual changes in circumstances,” It only needs to be revised when your individual circumstances change — perhaps a divorce or other unanticipated life change.”

As added testimony to what Dr. Johnson knew was less than groundbreaking thoughts on the subject of the two future events and what to do in each, he offered, “ I had a former co-worker who, in the run-up to the 2016 election, was convinced that Hillary Clinton was going to win and the stock market was going to crash. So, immediately prior to the election, he sold out of stocks and went to cash. Stocks surged the day following Trump’s victory, and my co-worker bought back into the market — at a higher price.”

Take-Away

Market hiccups are often short-lived.

While it is prudent to keep your eyes open and know what risks and potential rewards may be, it may also be smart to keep investing within specific boundaries. Those boundaries are best defined when volatility and predictability are average. Within the boundaries, there can be room to lighten up or overweight, but not in ways that pull the investor substantially out of line with their original goal while using the predefined arsenal of stocks, bonds, or other financial products.

Paul Hoffman

Managing Editor, Channelchek

Sources

Eric Lutton, CFA

Robert Johnson, CFA

The Fed Isn’t Pivoting, So Maybe Investors Should

Posted on by aweinsoff@channelchek.com
Image Credit: DrewToYou (Flickr)

Should Investors Consider Taking Different Steps for Diversification?

Diversification reduces risk; at least, this is what we’re told. It could also limit the upside, but it’s downside that is most concerning to investors. True diversification is a goal embraced by most. Investors used to try to achieve this by buying a broad stock market ETF coupled with a bond ETF. Well, the Fed-induced bond bear market, which is feeding the equity bear market, is a double whammy for these investors. So else is there to pivot to?

Investors’ goals used to be to make sure they achieved above index results, what I am hearing from investors now is they just want to stop losing money. The return benchmark has been changed.

Is Diversification Attainable

Historically, when stock prices have gone down, bonds have appreciated. That’s because rates tended to sink when economic activity faltered and rose when demand for money was higher; this is because the economy was growing. Bond rates today are less driven by economic pace and natural market factors. An active Fed has more control over yields. So this yin and yang relationship between stocks and bonds is much less negatively correlated.

While the U.S. and global economy are in unchartered waters, the scenario where the Fed has promised negative returns on bonds, and while stocks continue to falter from past stimulus being pulled from the economy by the Fed, alternatives may be worth exploring.

Investors, have been told to diversify using registered securities from a young age, at a young age these are often the only options. Securities include registered company stocks and bonds. They are then told the best way to do this is with funds (Mutual funds and ETFs) that contain many securities, thus assuring diversification across that asset class. But, over time, as more have taken to the idea of buying “the market” or selling ”the market” using funds, movements by those getting in or out of the market en-masse impact more and more people. This year trillions have been lost by investors because of this.

Do publicly traded securities still make sense? Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank says, “We have transitioned into a new investment cycle driven by higher inflation and a pivot by global central banks, among many other factors. This is likely to create higher asset price volatility and new market leaders.” Speaking for B of A he said, “We believe alternative investments can play a role in helping qualified investors pursue today’s opportunities.”

Source: Bank of America (Private Bank)

One “Alternative” that more traditional investors are now looking at is private equity. Private equity involves investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds for institutional and other accredited investors. This subset of investment alternatives is often grouped with venture capital and even hedge funds. The Investors are usually required to commit capital for extended periods, the lack of market price swings allows a level of stability not found in the bid/ask tick-by-tick valuations found in the stock or bond markets. This same advantage which allows management to be more focused on managing the company’s long-term viability limits liquidity for investors. This is why access to such investments is limited to institutions and qualifying individuals.

Other Asset Classes

In addition to qualifying as an accredited investor in private equity deals, those interested in alternatives may look to real estate, which also tends to fall with rising interest rates. Precious metals are also an alternative that investors use to diversify. The hedge fund universe provides an assortment of ideas and strategies that the fund managers use that are often de-linked from traditional markets.

Take Away

The Federal Reserve has indicated an unbending resolve to bring inflation. Mathematically this brings bond prices down with higher yields. Higher yields siphon money out of the stock market, which is already at a dimmer point of the business cycle. Alternatives, including private equity, has outperformed public markets and may also help manage portfolio volatility.

Investors that are uncertain if they qualify as an accredited investor may want to Pre-approve. There is no cost, Noble Capital Markets can do this and then provide those that meet the requirements access to its private deals. Knowing the options available and how to use them can provide uncommon and uncorrelated returns to a portfolio.

Source

https://www.finra.org/rules-guidance/guidance/faqs/private-placement-frequently-asked-questions-faq

https://www.privatebank.bankofamerica.com/articles/wealth-study-2022.html

https://www.privatebank.bankofamerica.com/articles/what-alternative-investments-are-right-for-me.html