After a dismal end for the stock market in 2018, we were all pleased to see stock markets around the world appreciate significantly in January 2019, igniting hopes for future gains as the year progresses.
At SRQ Wealth, our approach to portfolio management largely combines a “buy and hold” strategy with an “airbag,” or tactical strategy. The more conservative the client, the larger the “airbag.”
The “buy and hold” portion of the portfolio is composed of high quality managers and some exchange-traded funds (ETFs) with the goal to gain diversification, control taxes and to keep costs down. The “buy and hold” strategy holdings follow a 3-5 year outlook, are reviewed monthly, but changes are made only once a year, a unless a significant trend or economic event calls for adjustment sooner.
The tactical portion of the portfolio is solely made up of index ETFs, striving to allow us to be more nimble and reduce costs. This tactical segment follows a 12-month outlook, is reviewed monthly, and changes are made, on average, about 3-4 times a year. Typically these changes are small “tweaks” rather than significant moves from stocks to bonds.
Despite the recent volatility, we remain optimistic about the growth prospects of the U.S. economy and, more recently, have also become more optimistic about the growth prospects for international and emerging markets.
We expect the U.S. economy to continue to grow at a moderate pace in 2019, albeit slower than in 2018. Other markets have been out of cycle, and subsequently have some attractive valuations.
With this view of the economy as a backdrop, we made the following changes to our Strategic Wealth Management portfolios in the second week of March:
In our Income with Moderate Growth (most conservative) portfolio, we reduced our allocation to U.S. Large Stocks by 10% and introduced a 5% allocation to International Developed Stocks and a 5% allocation to Emerging Market Stocks. We also reduced our allocation to Short-Term Treasuries by 3% and introduced a 3% allocation to High Yield Bonds. Our Stock-Bond allocation in this, our most conservative model, now stands at 38% Stocks, 51% Bonds, 6% Alternative Asset Classes and 5% in cash, which we believe is appropriate given our outlook for 2019. Our bond holdings comprise a mix of investment and non-investment grade bonds, while our stock exposure is diversified across various global markets and market capitalization structures.
In our Growth with Income model, we reduced our allocation to U.S. Large Stocks by 4% and increased our allocation to International Developed Stocks by 4%. At the total portfolio level, we have a 59% allocation to Stocks, 35% Bonds, 8% to Alternative Asset Classes and 3% to Cash.
We did not make any changes to our Growth model - we believe this model remains appropriately positioned with 77% allocated to Stocks, 14% to Bonds, 7% to Alternative Asset Classes, and 2% to Cash.
For our Aggressive Growth model, we introduced a 3% allocation to a China ETF. This allocation came out of the broader MSCI Emerging Markets Index. We believe there is more good news to come for investors in Chinese stocks in 2019.
Clearly, keeping a close eye on investment management is important: it is the fuel that drives the financial planning “engine.” While investments are very important, we are always mindful that financial planning is the “engine,” and engines require tune-ups, maintenance and occasionally replacing old parts with new ones. If your financial planning engine hasn’t had a tune up in a while, maybe it’s time we took a look under the hood.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation does not protect against market risk.
Investing involves risk including loss of principal.