Stocks On Sale? Or About To Go On Final Clearance?

During market drawdowns, you often hear financial media types talking about stocks being “on sale.”

This phrase has always irked me.

It’s completely imprecise and utterly useless. Clichés may help sell airtime, but they get you nowhere toward designing or implementing a comprehensive investment process.

Instead of leaning on trite phrases, wouldn’t it be a lot less stressful to have an investing process that can smooth out the ride and generate a more optimal client experience?

2022 HAS ENTERED THE CHAT

I think too many investors (including financial advisors) prioritize short-term return over long-term process. Those who do, likely spent 2020 and 2021 zigging, then zagging. Zigging, then zagging.

Enter 2022.

The year began almost immediately with concerns about inflation and rising rates, which weighed on equities. In late January and early February, the market seemed to be calming. That was until tensions between Ukraine and Russia escalated and quick-punched volatility back into the market.

We’ve seen this process repeat – with risk on, then risk off – several times this year. Thus far, equities have been unable to hold a sustained rally to new highs.

Those who have continued to hunt for returns in a haphazard way likely vastly underperformed, as it would have been a serious challenge to keep up with the swinging pendulum of the 2020s. Here are just a few examples:

PRIORITIZING PROCESS

Please don’t misunderstand me; it’s not that I think pursuing return is bad. After all, isn’t that the whole point of investing?!

Where I think the “bad thing” comes in is when investors chase returns without a concrete plan.

Personally, I think there’s tremendous value in having a plan for all types of environments, regardless of the current state of the market. Pre-determining how you will react to a future event not only removes biases from impacting your decision-making ability, but also gives you the freedom to enjoy conditions in the present.

Systematic investing is a common a way to achieve this level of pre-determination of future actions. And while many asset managers – TOO MANY asset managers, in my view – like to position their systematic investing strategies as super sophisticated and proprietary, the “black box” sometimes has more to do with ego and justifying fees than anything else.

More specifically, a trend-following processes can be built so that it’s rules-based, adaptable, transparent, and something financial advisors can explain to their clients in plain English. A robust trend-following strategies often will invest in all the major global asset class and make allocation adjustments based on the intermediate- and long-term trends taking place in each class.
I think the argument for taking this systematic, yet asset-class-agnostic approach was strengthened by the market disparities between 2020 and 2021. And I think the value of systematic investing has been reinforced further in 2022.

• In 2020, you may have received an overall portfolio return below the long-term average unless you were disproportionately invested in very specific sectors or factors
• In 2021, this was again true, but with an almost completely opposite set of holdings
• In 2022, there’s been a reversal pretty much everywhere, with the downturn in growth, high beta, and fixed income being particularly noteworthy

In all three years, you likely had a “smoother ride” if you used a systematic investing process to drive allocation decisions.

WINNING MORE BY LOSING LESS

The following illustration certainly won’t be new to most financial advisors. The “periodic table” of asset class performance is a popular tool for illustrating the importance of diversification to clients.
Borrowing from chemistry, this table shows calendar years from left to right, with individual asset classes lined up under each year in descending order of their performance. The main point is to show that any asset class can vary widely from one year to the next, going from a top performer to one of the worst. Thus, portfolio diversification it is best.

This “periodic table” takes the concept a step further by adding:

• A buy-and-hold diversified portfolio to show the impact of asset class diversification
• A trend-followed diversified portfolio to illustrate the effect of asset class diversification and time diversification

The Value of Asset AND Time Diversification
Global Asset Class & Portfolio Annual Returns (2000-2021)
click for PDF version
click for PDF version

Source: ICE Data Services and Blueprint Investment Partners, 1/1/2000 to 12/31/2021. These asset classes represented by funds: large-cap growth = VIGRX; large-cap value = VIVAX; small cap = NAESX; international = VGTSX; global bonds = TPINX; bonds = VBMFX; REITs = VGSIX. Commodities represented by GSCI Index, presented net of annual sub-advisory fees of 0.50%. Diversified (trend followed) is a model portfolio and construction is explained in the disclaimers below, presented net of annual sub-advisory fees of 0.50%. Diversified (bought-and-held) is a model portfolio and construction is explained in the disclaimers below, presented net of annual sub-advisory fees of 0.50%. It is not possible to directly invest in an index.

What jumps out to me when I look at this illustration is how using the trend-following approach provided a more stable progression through the table. Returns are only occasionally near the top, but also (and perhaps more importantly) they are rarely near the bottom (a testament to the ability of trend following to account for downside protection). The final result over the full sample is a more equity-like return profile, but more bond-like risk/volatility behavior.

I think 2020, 2021, and so far in 2022 present near-perfect examples of why this is important. If you chase returns, or try to buy stocks when they are supposedly on sale, you may actually find yourself catching a falling knife. The alternative is an approach that offers a consistent, steady process – as well as a more consistent, steady result. It isn’t married to any one asset class or factor, but it is unwaveringly rooted in a philosophy of being systematic as a means of adapting to whatever sets of facts dominate the market.

If this is a topic you’d like to discuss further, I welcome the opportunity to chat. Please reach out anytime.

Disclosure:

Past performance is not indicative of future results. Any investment strategies and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

The investment strategy of the models are as follows:

Diversified (Bought-and-Held) reflects a portfolio with equal weighting of the following eight asset classes: large-cap growth = VIGRX; large-cap value = VIVAX; small cap = NAESX; international = VGTSX; global bonds = TPINX; bonds = VBMFX; REITs = VGSIX; and commodities = GSCI Index. The portfolio is rebalanced monthly. Performance results are presented in U.S. dollars and are net of annual sub-advisory fees of 0.50%. It is not possible to directly invest in an index.

Diversified (Trend Followed) reflects a portfolio comprised of the following eight asset classes and starting weightings: large-cap growth = VIGRX (20%); large-cap value = VIVAX (20%); small cap = NAESX (15%); international = VGTSX (15%); global bonds = TPINX (5%); bonds = VBMFX (10%); REITs = VGSIX (10%); and commodities = GSCI Index (5%). It is further broken down so that 20% of the portfolio is bought-and-held, 40% 10/100 EMA indicator, 40% 50/200 EMA indicator. The portfolio is rebalanced monthly. Purchases and sales, when signaled, are made at the opening price. All other daily rates of return are close/previous close. EMA signals are tracked daily based on close prices. The daily EMA signal on the last day of the month becomes the monthly signal for the subsequent month. For example, if the daily trend signal is up on November 30, the monthly trend signal will be up for the month of December. Purchases and sales are signaled when the monthly trend signal changes. An uptrend reflects the 10-day EMA being greater than the 100-day EMA or the 50-day EMA being greater than the 200-day EMA. A downtrend reflects the 10-day EMA being less than the 100-day EMA or the 50-day EMA being less than the 200-day EMA. When a trend system signals a sale, the invested sum moves to cash until there is another buy signal. Buy-and-hold system purchases at the open on the first trading day in the model and does not buy or sell following this initial event. Performance results are presented in U.S. dollars and are net of annual sub-advisory fees of 0.50%. It is not possible to directly invest in an index.

Performance results reflect no trading expenses or slippage. The full sum can be invested without regard for fractional shares. Performance results include the impact of stock splits as well as the reinvestment of dividends and capital gains. Actual fees may vary based on, among other factors, account size and custodial relationship.

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Market commentary, also referred to as insights, have been prepared by personnel of and for Blueprint Investment Partners. The information contained within the market commentary has been provided as general market commentary only and does not constitute any form of regulated financial advice, legal, tax, or other regulated financial service. It is not investment research or a research recommendation, as it does not constitute substantive research or analysis.

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