4th Quarter Updates
Today’s note is just a recap of our investment process along with a brief explainer on some small shifts we made in response to changing market conditions. Important disclaimer, while we may use different models for clients with different preferences and in different situations, the general ideas remain the same.
The 4-Step Investment Process
Source: Blackrock Q4 Model Portfolio Summary
The first and last steps of the process are likely the most important.
Step 1: Long-Term Strategy
The first element is developing the long-term strategy. While many investors believe they have a long-term strategy, what they really have is a dream of outperformance that relies on moving from one investment allocation to the next based on what is trending at any given moment.
At TSA Wealth Management, having a long-term strategy means something entirely different.
For example, when we create a long-term strategy for a client, it may be something as simple as “Maintaining 2 years of spending money in cash equivalents, 5 years of spending money in bonds, and the rest in a broad-based portfolio of equities.” We would then execute that strategy over the course of our client’s retirement. The strategy only changes when a client’s goals or situation have fundamentally changed.
Step 4: Protecting the Portfolio
The last element, “protecting the portfolio” is important in that it explains how we define and manage risk.
When we talk about making trades inside the portfolio based on current market conditions, we are not talking about overhauling the strategy. We are simply making shifts that will keep us within 300 basis points of our benchmark. If we are right, we may beat the benchmark by up to 300 basis points. If we are wrong, we may underperform the benchmark by 300 basis points. But the strategy is to avoid a situation where the benchmark can run away from us.
For example, if our benchmark is a 100% equity portfolio, managing risk in volatile markets would not mean moving entirely to cash, bonds, or shorting the equity markets. Anyone who has ever tried one of these strategies at the bottom of a bear market can tell you how catastrophic they can be.
Instead, we manage risk by making small changes such that if the benchmark were to go down 10%, we would expect to be down somewhere between 7 – 13%. If the market went up 10%, we would anticipate being up 7 – 13%.
It is never fun to be down, but exposing the portfolio to occasional losses is the requisite cost of making sure you are also invested when the market is going up.
Recent Updates
Source: Blackrock Q4 Model Portfolio Summary
Having first described the process, I’ll now give you a list of some of our recent model updates for the 4th quarter.
For clients with stock portfolios:
Moved 2% overweight to stocks with additional overweight in US, growth, and tech.
Decreased exposure to Europe and China.
For clients with bond-heavy portfolios:
Added some credit risk for the added yield.
For a full breakdown the updates to our ETF models, here are links for the Target Allocation ETF models, the TSA Core models, and the TSA Tax-Aware models.
As always, if you have questions about this or anything else, please don’t hesitate to reach out or schedule a meeting.