Investments in a Volatile Market: Positioning to Help Smooth the Road
by: Smith and Howard Wealth Management
We believe building wealth and keeping up with the markets over the long-term require the investor to stay invested and to rebalance their portfolio by adding during market dips and trimming in areas after strong market run-ups. This is hard to do and requires a disciplined non-emotional approach; we find very few investors can remain non-emotional through market swings. The recent market volatility surrounding the Brexit vote is no exception.
We experienced a strong sell off in equity markets only to be followed by strong rebound as the dust settled. Then on Friday (July 8) we received a very strong jobs number (287,000 nonfarm jobs added*). Pre-Brexit, the markets most likely would have responded with a sell-off based on fears of the Fed raising rates. Post-Brexit, there is far less concern about the Fed raising rates, so the markets rallied on the strong jobs number.
The last few weeks have been very volatile and this is a theme we expect to continue for the foreseeable future.
SHWM’s approach to investing is centered on asset allocation and diversification in our clients’ portfolios, with the goal of capital preservation and prudent growth over the long-term. Our methodology provides a balanced asset allocation model and a diversified portfolio focused on long-term investing. With diversified portfolios, opportunities can exist when assets within the portfolio move in different directions for periods of time in response to market changes. This movement creates a need to rebalance within the portfolio which can create a smoother investment ride over time.
Selecting and Managing the Managers
SHWM spends considerable time researching and selecting not just the types of investments to be included in portfolios, but also the managers of those investments. We look for and select managers that follow a disciplined process, which in some cases includes risk mitigation and/or the ability to profit in down markets. We continue to search for and watch mangers that we believe will improve the overall portfolio.
International Funds and Currency Hedging
With Brexit driving much of the investment world discussion lately, we thought it a good time to talk more about our investments in an active international manager, an important international slice of our clients’ portfolios.
This fund has a long-term track record of very strong risk-adjusted performance, is low cost and executes a very disciplined approach to investing. They will raise and hold cash when stocks become too expensive based on their models and purchase when securities are selling at a discount to the same models. They do hedge currencies and they have always held some portion of the portfolio in gold and/or gold mining stocks. We think this approach has served them well and we are very happy with their performance. They don’t always move in lock step with the international index so they provide nice diversification.
The Case for Gold
As mentioned above, a portion of the fund’s holdings is in gold. This international manager seeks the lowest cost gold ounces both above the ground (gold bullion) or underground (gold miners). SHWM added this fund to our client portfolios in 2010.
Gold is a potential hedge “against the consequences of unforeseen events,” as stated by the fund. Unlike equities, gold is not held in portfolios as an investment seeking a return, but as a hedge. And to that end, gold is a hedge against all currencies – foreign and US. Gold holds a global status as a “store of value” and does not depend on any individual government for its value, nor does the business cycle impact its value. As currencies fluctuate, wildly at times lately, we believe the inclusion of gold is very important. Furthermore, in a zero interest rate or negative interest rate world, there is no opportunity cost to hold gold instead of cash.
Through June 30, 2016, gold increased in value by over 26%. I will be meeting with this international manager in a couple of weeks to get a full update on the portfolio, but I expect that they trimmed the gold positions and added to equities based on volatility and the divergent performance of gold and international equities over the last few weeks.
In future communications, we’ll address other managers that play a role in our asset allocation models. Also, our quarterly Your Family CFO Report will be out next week taking a look back at the second quarter with some current flavor from the most recent market news.
As always, please call me at 404-874-6244 if you have any questions.
All references in this publication referring to our average allocation or “typical portfolios” reflect those of the fully discretionary accounts of clients with moderate risk profiles. Actual client portfolios are tailored to individual client circumstances and asset allocations may vary. Any reference to returns reflect the performance of asset classes, are for illustration purposes only, and do not reflect the returns of any specific investment of Smith & Howard Wealth Management. No representation is made that any investment decisions discussed herein have been profitable in the past or will be in the future. Past performance is no guarantee of future results. A list of all recommended investments is available upon request.
Subscribe to our newsletter to get inside access to timely news, trends and insights from Smith and Howard Wealth Management.