Portfolio Updates: Winter 2019

James Englert

Written by Jim Englert, CFP®, EA, President and CEO

January 2019

Market Trends Analysis
The primary focus of our Market Trends Analysis (MTA) strategy is to minimize downside risk throughout the investment experience.

2018 was a busy year in MTA. Many of the technical indicators that help determine investment exposure in the MTA accounts were triggered, causing us to seek the security of a less-volatile investment or, in the extreme, cash. Many of the short-term bond funds that we utilize gave us the safe haven we were seeking this year. At the end of the year, we reduced our exposure to international stocks, real estate and domestic mid-cap equities. In addition, we adjusted the bond exposure from long-term to intermediate- and short- term.

As the Current Market Conditions article discusses, it is difficult at this vantage point to determine the direction of the markets for 2019. Our continued daily analysis helps to make the decisions necessary to not only to help defend our balances in the accounts, but also to have the exposure necessary to participate on the upside.

Market Trends Analysis Sector Rotation Portfolio
The Sector Rotation Portfolio follows the sectors that lead the market. When fully invested, this portfolio is all in stock or equity exchange-traded funds. The primary focus is to be invested in the sectors that are outperforming the broader market.

Sector Rotation portfolios were fairly quiet during the first several months of 2018. However, with the volatility of the last four months, we took a very defensive position, with a great percentage of the portfolio invested in bond funds and the remaining equity exposure invested in more defensive sectors such as utilities, consumer staples and health care.

Core Market Index Portfolio
Core Market Index Portfolio (CMIP) is a low-cost index alternative providing a long-term investment strategy that remains invested throughout all market conditions.

CMIP rebalanced the accounts to the target asset allocation in January of 2018. The first three weeks of 2018 were simply a continuation of the increases in the markets that we came to expect during all of 2017. Unfortunately, volatility began to settle in the markets and in our investments. A recovery soon occurred only to make our high points for the year toward the end of September. Then, many markets (large-cap, mid-cap, small-cap and international equities) began to fall into correction territory (defined as markets declining more than 10% from their most recent highs). A correction can and often does occur during a bull market. As we know, markets cannot continue to constantly rise. A correction can take place to give the market a rest as it gets ready to continue on its long-term upward path.

Bear markets occur when they decline more than 20% from their recent highs. While some markets came close, it does not appear that we will remain in a bear market for long, if at all. As CMIP is a buy-and-monitor strategy, the impact on these portfolios was as expected given the volatility of the market, particularly in the last quarter of 2018.

Enhanced Allocation Strategy
The Enhanced Allocation Strategy (EAS) is a buy-and-monitor investment strategy that uses actively managed mutual funds to create a diversified portfolio.

The EAS Strategy experienced a “makeover” in July 2018. We replaced close to one-half of the existing funds with new funds that better represent the target asset allocation we wanted to accomplish in the EAS portfolios. As in most portfolios, toward the end of 2018, the investment in EAS followed the decline in the broader markets. The fact that these and all of our investment strategies involve an asset allocation design approach helps limit the decline in value of each fund based on the percentage each fund represents in the broad portfolio.


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