All managed portfolios continue to be significantly overweighted in defensive instruments such as cash and bonds at the present time. Both The Appleton Group Portfolio and our PLUS Strategy have no more than 25% exposure to market risk, which leaves each more than 75% defensive. This is extreme, but might not be conservative enough, to be honest. Last week’s strong market action made being defensive look foolish. This week’s action makes having even 25% exposure to the markets look aggressive. Tax Managed Growth has only slightly more exposure, with a maximum of only 35% invested in at-risk assets right now. We currently hold modest exposure to U.S. equities (15-25% maximum), as well as our continued position in U.S. Commercial Real Estate (10% maximum). Our brakes continue to be applied fairly aggressively. If, over the very short-term the markets for these positions cannot find their footing, they will be reduced and/or eliminated once again.
Because of the occasional massive upward swings in the markets over the past six weeks, we don’t hold any “bear-market” investments right now. In my opinion, they continue to be the best bargain in the markets if this downward economic and market trend continues uninterrupted; but the upward volatility has made these positions difficult to hold as well. We’ve done our best to balance our desire to profit through them with our client’s collective desire for predictability (using bear-market investments in our PLUS and Tax Managed Growth strategies does decrease short-term predictability). It appears increasingly unlikely that both goals can be accomplished at the same time. If economic conditions continue to worsen and the Fed and other agents of stimulus have run out of bullets, it is my belief that there will be plenty of time to use them in the not-too-distant future.
The current market environment is less predictable than at almost any other time in memory. From day-to-day, the percentage move in so many markets is well beyond what anyone would consider normal. Truthfully, predicting the next day’s move has always been a foolish proposition – I don’t even try. And one day’s move doesn’t make a trend. But we’re clearly in an environment where investors must have the courage to take a well thought-out stand and give each adjustment at least a reasonable amount of time. When we adjust our portfolios’ exposure to the market it is done so without emotion, and with a clear statistical methodology in mind: eventually there will be a sustained market move in one direction or another. Our job is to adjust so that we are in front of it when it does occur. And it may take several more adjustments, just like it did in at the top of the market in both 2007 and 2000 and at the bottom of the market in both 2009 and 2002, for example. Eventually, there will be a “right side of the market.” Right now, it’s impossible to say what direction that is.
