Updated: Mar 15
I initially sat down to write this note with the intention of explaining why global markets and commodities are reacting the way they are to the crisis in Ukraine. Given the intensity of the news cycle, I thought it would be more important to share with you how we are handling volatility and how we are preparing for what the future may bring. Anyone who claims to know how this war is going to play out, or when investors should “buy the dip” or “go to cash”, is being a bit disingenuous. Ultimately, there is nothing in modern investing history that can be reasonably used as a guide. As such, we have chosen to stick to objective data points and principals ingrained in our process.
While this sounds nice, the core ethos of investing is to buy low and sell high. Defining “low” and “high” is the tricky part. Let’s go ahead and unpack what we do know. Inflation is sticking around. The combination of reduced supply, increased demand, and loose monetary policy nearly guarantees inflation will remain above traditional levels for the foreseeable future. We also know that wage inflation is making new highs in the face of a very challenging earnings environment. Effectively, input costs are skyrocketing while both monetary and fiscal policy are set to tighten (or already have in some cases).
By most traditional metrics, US stocks are still quite expensive. This means there is a reasonable chance they can continue on a downtrend. The obvious question is “why not just sell all stocks?” The answer is not quite as obvious. When downtrends stop, they tend stop abruptly. Attempting to trade around bear market bounces and actual trend reversals is historically very challenging. This is where the old adage, “time in the market is more important than timing the market” comes into play. I agree with this to a large degree; however, I also believe that tactical risk management has merits.
Many of the trades in our broadly diversified asset allocations have been geared to tactically manage risk. As these moves have generally resulted in profit this year, I have chosen to leave the majority of the proceeds in cash. Our core asset allocation has remained largely unchanged, as timing the broad market is quite difficult. For review, the core allocation represents most of the account and does not change much from year to year, aside from rebalancing. The most significant change you will see is a larger than usual cash allocation. For reference, cash normally represents between 2-3% of an asset allocation. At this point, most strategies have quite a bit more cash.
Please keep in mind, our portfolios are tailored to the needs of each individual investor. As such, some accounts with ongoing distributions or other various restrictions will show allocations in line with their specific goals.
In closing, I empathize with those of you that are scared at the world around us. While Ukraine is geographically far away, the attack on democracy hits unusually close to home. This violence, coupled with the already volatile market environment, makes for an uneasy start to the year. My hope for this note is to remind you that our team at CFG is managing your financial life with sound minds and no emotional bias to the volatility in the market. Between 3 advisors, we have 105 years of combined experience, and we have seen a thing or two.
If you would like to share a call or schedule a meeting to discuss how the current environment is impacting your plan, please reach out to us at firstname.lastname@example.org or give us a call at (303)-629-7500.