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A Users Guide to Portfolio Management

Equity markets can be volatile, a general rule that sounds like the understatement of the moment. Since the beginning of March, the S&P 500 has had daily movements of more than 4% in 11 out of 15 trading days. With markets experiencing extreme volatility it is important to review one of the most fundamental best practices of portfolio management. 

Rebalancing 101

The primary function of rebalancing portfolios is to control risk, but effective rebalancing can also help to increase average annual returns of a balanced portfolio over its lifetime.

At Allegiant, we regularly rebalance client portfolios. But what does this mean? Specifically, this means over the last few years we have been taking profits in equities and rebalancing into bonds. In years like 2019, selling out of stocks seemed like a bad decision. Fast forward to today and our disciplined rebalancing strategy played a very important role in reducing downside risk. 

Tactical Weightings

Rebalancing to the model is the first step, the second step is implementing tactical asset allocation decisions. Allegiant manages portfolios both strategically and tactically, utilizing under-weight, equal-weight, or over-weight allocations. For example, a target equal-weighted 60% equity/40% fixed income portfolio could be over-weight equities (65%/35%) or under-weight equities (55%/45%). For years coming out of the last recession, Allegiant ran model portfolios over-weight equities. In 2018 we moved back to our strategic equal-weight target allocation and earlier this year tactically moved to under-weight equities. 

These somewhat minor tilts in allocations can make a significant difference. Today, as markets experience the fastest decline from a market top to a bear market in history, we take comfort in our tactically under-weight equity portfolios. 

While our model allocations are already under-weight equities, the recent market decline has shifted equity allocations even lower in balanced portfolios. This puts us in a very powerful position. Our tactical under-weight to equities, along with an above-average cash position, allows us to play offense instead of defense. Why? When others are looking (or being forced) to sell equities, we are looking for opportunities to buy so that we can rebalance your portfolio back to the long-term strategic allocation. We are now buyers at the right price versus sellers at the wrong price.

2008 Comparison

As scary as it may be to buy equities when all they seem to do is go down, that is precisely the time we should be buyers. As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”

With the S&P 500 down nearly 32% as of this writing, markets are approaching the average bear market decline (-36%). Whether or not this is an “average” bear market is certainly up for debate. 

I’ve recently seen many comparisons to 2008. Are we going to go through the same dramatic decline as 2007-2009? The honest answer is we don’t know, nobody does. However, it’s instructive to examine the comparison.

The U.S. stock market’s steep decline over the last few weeks is reminiscent of the decline in October 2008 as shown in the chart below. The red star shows where the market is today in comparison.

A Users Guide to Portfolio Management SP5001

Every time is different but using this comparison one could expect further declines to come. If we knew for sure that we would see similar declines to 2007-2009, then buying equities here would not be smart. Or, would it?

Let’s widen our view and look forward. If we bought equities at this point in the 2007-2009 decline and held through the market peak a month ago, this is what we would have experienced. 

A Users Guide to Portfolio Management SP5002

Investment markets are scary at times. As investors we must focus on the long-term and not let short-term volatility derail our well-laid plans. Only investors who accept short-term volatility earn long-term gains. 

The Allegiant team has remained disciplined investors of your capital throughout the ubiquitous cycles of hype and hysteria. Leading up to this bear market we looked for opportunities to reduce risk, which positions us very well to start looking for opportunities to add risk assets while prices are down. 

As the headlines get worse, many opportunities are arising for successful long-term investors. In light of this, we must remain calm and carry on, not let our emotions lead us to make bad decisions, and remain focused on the long-term. 

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