Q4 2018: Positions of Strength

December 24, 2018 Market Commentaries

“I will be the smart money during the next downturn.”

“I will take advantage of cheaper asset prices. Buy when items are on sale!”

“I have a built-in ‘defensible’ space.”

“I have a good plan in place.”

“I am allocated properly.”

These are the statements every investor wants to be true. As a client of Van Hulzen Asset Management, I feel confident in saying this is true of you, too!

Why do I feel so confident? Because your investment allocation is built on an assessment of a large body of aspirational, personal and investment information that we have gathered in our meetings, conversations and modeling. We spend extraordinary amounts of time and energy internally reviewing your goals, your balance sheet assets, and your cash flows. When combined with your personal statistics and the current market conditions, the asset allocation strategy that we build and manage for you is reflective of a risk-appropriate mix of assets designed to carry out your long-term plans.

Where were you in 1972? A recent Bloomberg article stated that in 1972, the markets declined so broadly that no major asset class (US Large-Cap, US Small-Cap, International Stocks, Emerging Market Stocks, Investment-grade Bonds, High Yield Bonds, Commodities, REITs, Gold, and Preferred Stocks) posted more than +5%. No matter where investors placed their savings, the asset class posted a poor performance.

Well, in 2018, this same group of asset classes managed to post a worse year than 1972. Not a single asset class was above 0% in 2018. Even the usually reliable “Investment Bond” asset class posted a -3.8% for the year.

So, if 2018, and especially the fourth quarter felt difficult, now you know…It was indeed very challenging.

Defense and Offense

For several quarters now our commentaries have had a common theme. Caution. No, we didn’t run and hide from the stock market. That’s not what we do. We do not guess about market turns, but we have been concerned about the level of stock prices. Our investment committee meetings have been heavily focused on identifying risks, removing stocks with bloated debt levels, removing bonds with deteriorating fundamentals, removing funds that deviate from their mandates, and swapping investments away from identifiable macro risks.

In mid-September, I wrote about bees and how they are a great model in preparing for winter. I had no prior insight that the market would top at the end of September and plunge in the fourth quarter. No one can know when the market will turn and trying to time market turns is a fool’s errand.

But here is a fact I do know to be true. If your asset allocation is based on a plan built by Brad Nicholson, Martin Weil or Jarrod Jacobi, or if you have gone through a top-down balance sheet review and risk assessment with me, then you have the right amount of stocks (risk assets) in your portfolio. In twenty years of providing investment advice and managing money, I cannot recall a single time when someone accused me of being too aggressive. Those who have worked with me for a long time know that I believe investing is the deployment of capital into a risky proposition only after risk has been measured. Everything else is gambling. I discuss risk in almost every meeting and every setting and have sometimes been accused of trimming allocations early, of missing some upside, of not having enough in stocks. After all, a 10-year bull market can make asset allocation strategies seem obsolete and costly.

But we have a mantra at Van Hulzen Asset Management – when we allocate assets, we will recommend an allocation with the least amount of risk necessary to achieve your stated goals. Over the years, I’ve had countless conversations about taking more risk. You are the owner of the investment assets and we are your advisers. It is always the prerogative of the owner (you) to suggest more or less exposure to investment risk and investment reward. It is our job to define risk, to point out what could go wrong, to measure it, and to provide guidance on risk exposures, to make an informed decision together and then to implement that mandate.

If we measure what could go wrong before we allocate, then the upside will take care of itself.

Now that we are once again in the midst of volatile price action and bear markets (defined as 20% declines in an asset class or country) are popping up everywhere, we can take comfort in our allocation decisions and in the plans that have been developed.

Bear markets are not fun, and I do not enjoy them one bit. They are tough. They have fast rallies and steep plunges. They invoke emotional responses. Now that volatility is back, let’s review some defenses that are in place.

1. You have a plan, built specifically for you, and being executed and measured consistently.

2. You have a built-in ‘defensible space.’ Whether in your bank accounts or through cash and short-term bond investments in your investment accounts. These assets are providing stability and liquidity. They are “ready cash” for asset purchases or living expenses.

3. You have an advisory team who is your partner in good times and in tough times.

These are important and powerful defensive layers.

Healthy Living & Healthy Finances

When it comes to our physical health, we all need a doctor much more when we are ill. And we need a good prevention and wellness plan when we are healthy. When illness inevitably befalls us, we want a doctor to provide expertise, prescribe necessary medicine and take action. So too is our approach to financial health. This is our commitment to you.

Financial health leans more heavily on a professional and dedicated advisor in hard times. And we need equal parts risk mitigation (prevention) and asset allocation (wellness) in order to be ready for the inevitable downturns.

And since it is the season of resolutions, let us resolve together that we will be the smart money. That we will take advantage of lower asset prices. That we will maintain open lines of communication in order to keep our plans current and appropriate.

If we keep these New Year’s resolutions, we will enter into the next expansion in a position of strength and ready to benefit from having made all the right decisions.