Not far from Oakland California lies the waterside city of Benicia which served as the States capital from 1853 to 1854. Located along the banks of the Carquinez Strait (a tidal estuary created by the Sacramento and the San Joaquin rivers as they drain into theSan Francisco Bay) the city boosts some impressive views of the last centuries modern marvels of bridge building.
In fact, in 1901 the Carquinez Strait Power Line crossing was the world’s first power line crossing of a large river. My family and I had the privilege to live in this quaint city in the early seventies. Our house overlooked both the Carquinez and Benicia-Martinez bridges, two of the many impressive Bay area bridges. I remember the first time seeing the Carquinez Bridge from my bedroom window and the feeling of pure amazement that such a structure could be built.
The image of that bridge has been fresh in my mind as I have been thinking of ways that I could help individual investors bridge the gap between the fundamental headwinds that face the investment landscape with the need to create an investment portfolio that has a potential to earn in these uncertain times.
The ability to bridge the gap between the worries of the Bears and the enthusiasm of the Bulls is a bit art and science.
Wikipedia describes prudence as “the ability to govern and discipline oneself by the use of reason.” It was brought to my attention that prudence is a virtue.
Not your ordinary run of the mill virtue, rather one of the “Cardinal Virtues.”
Similar to its brethren Courage, Justice and Restraint, Prudence can become illusive in times of stress and uncertainty. Considering some of the world’s economic headwinds, prudence may be more than just a virtue.
It may be the investment theme to incorporate for conservative or moderate investors for 2012. “Govern, discipline and reason” is at the heart of the definition for prudence and can be used as a way to help you manage your investment mix.
Governing would be a process of reviewing the relative performance of your portfolio with an emphasis on downside vs. upside capture.
In simple terms this means you pay attention to how much your portfolio declines when the equity markets move south and how much your portfolio rises when the equity markets move north.
Ideally, you would like to see less downside and more upside but this is easier said than done and needs to be reviewed on a regular basis. (This will be one of our topics if you join us for our next Lunch and Learn on March 14th in Irvine.) Discipline, is the follow through to do these reviews on a regular basis as well as sticking to a plan that you have laid out for your longer term time horizon.
Too many investors get whiplash when they lose sight of their original goals. Reason, is where you invest a little time to look at the world around you and invest into assets that have some form of fundamental tail winds.
How might this look in a typical portfolio of someone that is either approaching retirement or is already retired?
It would start with an underweighting of equities within their portfolio. Let’s pretend you typically have a mix of 60% Stocks and 40% bonds in your portfolio.
Prudence would dictate that the equity exposure should be dialed down below 50%…. and reason would lead you to assets that are both tactically managed (with a track record of low volatility) and supported by the current Geo-Political environment with higher yielding dividends. This may lead you to assets in the commodity and energy sectors such as gold, oil and silver to mention just a few.
In addition to reducing equity exposure, bond holders would find prudence by reducing the duration of their bonds, meaning that bond holders should focus on bonds with a maturity date less than seven years and of higher credit quality.
Lastly, adding a third component of what has become known as “alternative” investments will help reduce market correlation and hopefully volatility as well.
Because it is impossible for me to know the risk tolerance and time frame of all our readers I will reserve the right to provide specific names of investments and strategies for anyone that contacts us or join us at our next lunch and learn where we will discuss specific investment sectors that could fit within the virtue of prudence.
Many years ago Sir John Templeton proposed an investment thesis that sounds easy, but in actuality can be one of the most difficult things to do.
Templeton stated something along the lines of “When others are greedy you should be fearful and when others are fearful you should be greedy”. Over the years there have been similar phrases such as “the time to buy is when there is blood on the street” to help represent the goal of all investors….to buy low and to sell higher.
Patience is the key to mastering this concept.
I can’t tell you how many times I get calls from people wanting to jump into the markets or a particular asset close to the end of a big move. They typically call after seeing a brief mention on the news or some bragging from a golfing buddy. The thought of missing out gets their greed factor running and all prudence goes to the way side. This is the result of an interesting way in which our brain operates, markets know this and look to exploit it as much as possible. Patience is what is needed to avoid this trap.
Over the next 3 to 5 years there are going to be plenty of opportunities for all investors to take advantage of the creative destruction that is currently taking place throughout world economies. In the end, patience will help you avoid the investor grieving process of buying high and getting scared out at the low.
One way to practice patience is to use technical analysis to help you stage purchases into an investment of interest.
Doing this allows you to put your money to work over a period of time based on areas of previous support. There isn’t enough time or space to go in depth in regards to this, (not to mention it we will be covered in depth at our next lunch and learn) but I’ll leave you with a few resources that can help you learn more about technical analysis.
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Optionality is the ability for your portfolio to ebb and flow with the changes that markets will experience over the next few years. I would highly suggest not underestimating the importance of optionality and therefore encourage you to make this thought the hub of your portfolios design.
As the old saying goes “There are many ways to skin a cat”, there are many ways and many investment products that can be used to help you interact with financial markets. This is where art meets science. It is the juncture where your needs, wants, risk tolerance and portfolio structure come together. Optionality suggests that you, or your advisor, have a clear understanding of the options that are available to you in both investment product as well as diversification and allocation strategies.
That is a long winded way to say, know your options.
There is a whole suite of investment products that range from mutual funds, exchange traded funds, bonds, annuities and actively managed strategies that are available to help you accomplish your needs.
Using the right tool or the right mix of tools will be one of the biggest benefits to investors that want to maximize their optionality while remaining prudent.
I would encourage you to learn more by talking with your current advisor or contacting us for any insight we may be able to provide for you in helping you bridge the gap between the world we are in and the needs you have for your portfolio.
Newport Coast Asset Management
The opinions expressed are those of Colby Mcfadden and Quiver Financial as of February 27th, 2012 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a registered investment advisory.