Happy Election Halloween

Happy Halloween.  We trust this note finds you anxiously looking forward to putting next week’s elections in the rearview mirror.  We also hope your friends and family are safe & healthy.

This note will be shorter than most as we simply wanted to drop you a friendly reminder of how we’re positioned in our core portfolios. As most clients are aware, we choose a target equity allocation, and we manage around that number, based upon a client’s risk tolerance, the market environment, sentiment (fear vs. greed), and other metrics.

So, let’s take a minute and review how a portfolio with a long-term target allocation of 60% equity (a Moderate Portfolio) has been positioned so far in this unforgettable year of 2020.  We entered the year with the stock market setting all-time highs. Thus, the 2nd week of January we reduced equity exposure and our 60/40 portfolio was reallocated to 50% stock, 50% bonds.  The market peaked a month later and by mid-March, the S&P500 bottomed out -35% from those February 19th highs.

As fear ravaged the global markets we added exposure at lower prices and, by the time the market had bottomed, that 60/40 portfolio was approximately 72% stocks/28% bonds. In other words, we moved 20% of the portfolio into stock/out of bonds at much lower prices than we sold at in January.

From there, most would agree, the unprecedented market rally off those March lows, was an extremely pleasant surprise, based on what was happening on ‘Main Street’, as they say.  In late April, after a 25%+ rally we took profits and moved back to 60% equity exposure, or our base target level.  In more aggressive portfolios we maintained more equity exposure.  By mid-July the market was up another 14%ish and we lowered exposure to 50/50.

In early September the S&P500 was at an all-time high in the midst of massive economic uncertainty and proceeded to drop 10% over the following 3 weeks.  Two weeks later, after an 8% rally from those 9/24 lows, and over 50% higher than the March 23rd lows, we sold another 10% and our 60/40 portfolio was sitting with 40% exposure to Stocks and 60% exposure to short-term Bonds.  40/60 is the most conservatively allocated that portfolio can be positioned, based on our parameters.

In short, we sold stocks at the all-time highs in January, bought them back in the middle of a vicious selloff in March, then took profits in April, July, & October.  We feel these allocation changes are prudent.

Since October 7, our conservative, moderate, and aggressive portfolios are positioned with as little equity exposure as we’ve had in the history of our company.   Why would we do that?  Well, aside from the ever-present uncertainty surrounding the pandemic, there is a Presidential election next Tuesday.  And, frankly, we felt that roughly 100% of the country might be nervous as we approached November 3rd.  Assuming a fair majority of those nervous folks are investors, a solid chunk of them may get scared and sell stocks because they’re scared of who may win.  Around here we often say: ‘Scared is not an investment strategy’.  It is, in fact, an emotion – a very valid emotion – one that we like to try and use to our advantage.

Election volatility tends to rear its ugly head during every Presidential election (click here for our past thoughts on this topic). We plan for it.  We embrace it.  The Dow fell 650 points Monday, 943 Wednesday, and, as this is written, may fall another 500ish points this morning.  We call this a ‘buyers strike’. It is logical that very few investors want to buy stocks this week.  It is also logical that scared investors will sell because of the unknown outcome of Tuesday’s election.  So, when you combine no buyers with scared sellers, you get the Dow Jones falling around 2000 points in a week.  The market may continue to fall Monday & Tuesday.  That is also logical, in our opinion.

However, like every other Presidential election that brought us the gift of volatility, we believe this current version is very temporary.  In fact, late last week we came across this tidbit of research:  In 18 of the last 19 elections, had you bought equities the day of the election, you were in positive territory 10 years later.  15 of those 18 times your investment at least doubled in value over those 10 years.  Election volatility is temporary.

The wheels of capitalism will still spin in our favor next Wednesday and beyond.  In the meantime, because of the profits we took these last few months, we plan to use the current pullback as an opportunity to buy equities at lower prices.  Again, we feel this is prudent.

Try and enjoy this Halloween weekend.  We certainly look forward to more treats than tricks – 2020 has brought too many tricks thus far.

Be safe, stay healthy, and make sure you vote on Tuesday if you have not already!

We appreciate the opportunity to help you.

Sincerely,

 

Your LJI Team