January 2020 Portfolio Updates

January 2020 Portfolio Updates

We are now nearly one month into the new year and the new decade. An interesting fact that has been a topic of discussion in the investing community recently is that the US economy didn’t experience a recession this past decade. While this might not surprise you, what may is the fact that this is the first time since the Great Depression that this has happened. According to the National Bureau of Economic Research, the US economy has, on average, experienced a recession roughly every four and a half (4.5) years. That said, we still believe in the strength and current state of the US economy and don’t see signs that point to the next recession occurring in the near term. At the same time, we also recognize that we are managing your portfolio to provide for you and your family, not just during your lifetime, but for your kids and grandkids; not just the next year. With that in mind, here’s a look at the changes we recently made to our portfolios and some reasoning behind those changes.

Alternative Investments

Historically, bonds have moved counter to stocks, and much like the ballast of a ship, bonds have acted as a ballast to your portfolio by smoothing out the ups and downs. When we looked at the movement of bonds over the past few market corrections and volatility bouts, we’ve found that bonds have started moving in closer alignment with stock prices, detracting from the purpose we have them in the first place. Given that the US markets, measured by the S&P 500, and more recently the Emerging Markets have performed remarkably well, we determined that it was a prime time to add some additional protection to our portfolios. It seems that market commentators everywhere are talking about how great things are in the economy and how they can continue to get better. We too believe that there is still plenty of opportunity for stocks to rise over the coming months, and possibly years, but also take heed to the words of the great Warren Buffett, who said: “Be fearful when others are greedy and greedy when others are fearful”. With this in mind, we sought out other tried and tested ways to add protection to our portfolios without costing an arm and a leg (either through costs or through poor performance). What we have found and added into our portfolios is a BlackRock fund that historically has been generally flat or slightly up when US stocks are going down, and has been up when the stock market is rising (however not nearly as much). It acts fundamentally different than traditional bonds and still provides the ballast to the portfolios that we were looking for. It does all this at about 1/3 the cost of comparable funds, partially through a contractual fee waiver from Blackrock. Should that arrangement end, we will once again review our other options. 

Environmental, Social, Governance (ESG) Investments

Another relevant change that we made to many of our portfolios was the addition of ESG funds. These are funds that invest in companies that are Environmentally conscious, Socially responsible, and have strong corporate Governance. These companies have chosen to put society before profits by minimizing activities that would be harmful to the environment, giving back (financially and otherwise) to the communities that they do business in, offering products/services that improve lives, treat their employees well, operate in a moral and ethical manner, have strong leadership teams, etc. In other words, these are good companies who do business the right way, while making money at the same time. Over the past few years, research firms and data aggregators have been adding more and more ESG metrics to the information they collect. This has allowed portfolio managers to be able to track the ESG metrics that are most meaningful to them and select those companies that meet their criteria. We believe that as our society continues to evolve the companies that have placed ESG at the forefront of their operations will be the most resilient during market downturns and a higher probability of surviving and thriving afterward.

Wrapping Up

While those were the larger changes, we also made some minor adjustments focused on improving the quality of the underlying holdings and proactively positioning the portfolio for the future, given how late we are in the economic cycle. We also used this as an opportunity to rebalance the portfolio and take some of last year’s gains off the table.

We continue to believe in the power of the markets, both domestically and internationally, to help you reach your goals and traverse these financial markets in a risk-conscious manner.