Even with 26 years in the financial services arena, 2008 left me feeling a cynical mistrust of what is considered normal in our business. The idea of trusting someone else through a mutual fund or money manager was no longer comfortable to me. I felt that I needed a strategy that I could explain, that would give me a reason to exit the market or stay in.
Conventional asset allocation suggests that a portfolio should have an appropriate mix of asset classes. You will find that my focus is on strong asset classes, not all classes. For example, I believe fixed income is a dangerous category currently (June 2017) yet in 2009, it was the strongest asset category. This was after markets had collapsed and you were buying bonds at huge discounts. I do not mean that owning bonds for income is not a reasonable strategy.
I believe relative strength and technical research are just as important as fundamental research. History has shown us that stronger-rated stocks mostly perform better than weaker-rated stocks. Few on Wall Street had negative comments on Enron even when the stock was technically broken.
To illustrate my point, consider XOM (Exxon Mobil Corp.), which we all might agree is a well-respected company. At the end of 2007, XOM sold around $90, it dropped below $60 in the correction of 2008-09, slowly worked its way to $104 and back to $80. Clearly, there was a time to buy this and a time to sell, but owning for the last 10 years has been a mistake.
I use both fundamental and technical research on an initial portfolio review. My philosophy revolves around managing risk as much as it can be managed. Anyone can buy a stock or position; having a strategy that attempts to manage risk or having a sell discipline is critical.
A good start to a meeting would be for me to show you how we score or grade a portfolio. If I grade my equity portfolio in this way and then do the same for your portfolio, it is easy to see whether you are taking more risk than you intended. There are times when we will buy a stock with poor technical strength on the advice of a fundamental analyst; sometimes this allows us to bottom fish where a technician typically would not go.
I am guided by parameters that can change with the market. Going to cash in 2008 made sense, but consider that this was likely the worst market we may see in our lifetimes, and consider also that if you owned technically strong companies going into the decline, holding these assets ended up being the right decision.
With the corrections of 2011, 2015 and 2016, going to cash was probably a mistake. While this may appear to suggest that there is no answer, having an explainable strategy as to how investments are selected makes sense. Owning the strongest companies worked for all corrections in the last 10 years, though the pain just lasted longer in 2008.
As much as possible, you will have clarity when you work with me. I want you to understand why I make a decision or recommendation. In terms of communication, you can expect to hear from me by email on a weekly basis. As markets move for whatever reason, you can expect either my interpretation or a breakdown of data from an economist I trust.
How Do We Start? We might score your assets as described above. We want to see a strong fundamental opinion supported by a technical opinion. If we have neither, I suggest we may be taking more risk than is reasonable. We need to determine what we seek to achieve and what our time frame might be. We would remove assets we both agree might be adding that unwanted risk. These positions would be replaced in a manner consistent with our mutually agreed strategy.