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Chalk Talk: November 2015

“Don’t just do something. Stand there!”

– Jack Bogle

During periods of market turmoil, we are often asked questions from our clients and acquaintances… 

“So what are you doing in client portfolios in response to this crazy market?” 

 In the world of investments, there are plenty of “tactical” strategies that are designed and sold on the premise that they will sidestep market downturns and wait out temporary declines by holding cash before investing in stocks again.

Too many advisors and investors claim to follow a disciplined strategy, but with the caveat that they will use their judgment and tactics to “adapt to changing market conditions”, or something along those lines.  In our experience, this approach is designed to give the appearance that something constructive will be done to add value, but the evidence is unmistakable that this kind of activity destroys value.

In our view, “activity for the sake of activity” is one of the worst transgressions in our industry.  But it’s not hard to see why it’s popular; we are generally conditioned to believe that when negative financial news makes the top story of the day, the experts should naturally know just what to do in order to stay one step ahead of the next day’s headlines, right?

At Financial Coach, we pride ourselves in telling the truth.  To be specific, it means we don’t mislead our clients by suggesting that we (or others for that matter) have an ability to know the future.  That’s why we emphasize being prepared for market downturns but spend no time trying to predict them.  And while that sounds reasonable, very few investors actually practice what seems obvious in theory.

There isn’t a point in employing a disciplined strategy if that very discipline gets thrown out the window when volatility inevitably shows up.  The purpose of having discipline within a long term investment strategy is precisely because of the damage that can be done if we decide to suddenly be tactical and emotional when markets invariably get skittish.  Doing nothing very often is the best tactic, and yet can also be the most difficult pill to swallow in times of duress.  Most humans aren’t wired to feel comfortable sticking with a plan when temptation (and the media) is telling you to do something…anything!

So what’s the answer to the original question?

Generally, we make changes to client portfolios when any of the following conditions apply:

1. The allocation of assets or specific securities has drifted far enough away from the intended target; at this point, we would rebalance the portfolio back to the target weighting.

2. A trade in a taxable account that takes advantage of price declines to generate tax losses with the goal of reducing current income taxes payable.

3. Changes to specific funds or ETFs based on our Investment Committee’s determination to improve the construction of client portfolios.

4. Modifying a client’s overall target asset allocation because of a change in personal circumstances, for example, a client’s ability, desire, or need to take on or reduce risk.

In no case are we making “tactical” moves designed around a view of expectations for short term performance of a particular asset class or sector.  Our 4 tactics are focused squarely around adding value to client outcomes through specific activities that do not involve a crystal ball or guesswork.

As always, thank you for your trust and confidence in us. Your feedback is always welcome.

Michael Traynor CFA®

Chief Investment Officer


This material has been prepared by FC Advisory, LLC (“Financial Coach”) for general information purposes only and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult a financial advisor prior to investing.