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Answering Common Portfolio Questions

By Wayne Wagner Jr. 
October 2023

I'm sending this out because I had three clients reach out with the same question about their portfolios. My gut tells me that if three of you make the effort to call, then a few more of you probably have the same question. We always invite your questions, and I hope you find this helpful food for thought. The question sounds like this: 

The markets seem to be up. Why are our portfolios positioned conservatively?

This is a point in the market cycle where we all get a little cagey. We all get a bit little impatient because last year, diversification worked really well and helped protect us from the worst of the markets. This year, diversification is not helping because while most of the market is flat to down, the indexes are showing a bit of growth.

This means that if you own a diversified portfolio of assets (and not a concentrated bucket of technology stocks), then you're lagging the market. That doesn't feel good. It's also against the backdrop of double digit outperformance like from last year for virtually all of our clients. Back then, the indexes were down between 18-35% and our clients were down fractions of that because of diversification.

This is a point in the market cycle where in a year like this, a concentrated tech sector is running the entire index and inflating our impression of the markets. It's easy to become a bit impatient.

That's why we want to be sure to be explaining what's going on with the portfolios on a longer range and how this fits in with your individual situation. The best option if you are concerned is for us to discuss your specific financial plan together, but this breakdown may help.

Reasoning for a Conservative Investing Posture

You'll recall in late 2021, we moved a bit more conservative. We raised some cash, and we sold off some stock exposure.

We did more work in 2021 with fixed index annuities. When interest rates rose in 2022 and into 2023, we shifted more more assets into fixed index annuities and short term bonds to make sure that the cash wasn't just sitting there. We were getting yield out of it and we were taking advantage of the rising interest rates and what that meant for the fixed annuity portions of the portfolios.

So, those were all things that we've done over the course of the past year, and we're still conservatively positioned in terms of our overall equity exposure. Additionally, we're still very diversified. 

Caution Around the Tech "Bubble"?

The bottom line is we're at a point in the market cycle, not dissimilar to the late nineties with the tech bubble, not dissimilar to 2007 where we had the housing and financial bubble. We're back at bubble status with technology companies.

We have a half a dozen tech companies that now make up a historically high percentage of the overall market index and that is driving the overall index performance year to date. 

Add to that – they're coming off of obviously a very difficult year last year. Now if you go out a little farther you go back to December of 2021, the one year or the year to date number may not look attractive. You go back to 2021 and you'll see that the indexes are actually still in negative territory relative to their all time highs.

That's the bigger picture regarding diversification. Elements within your portfolio have actually helped protect against that negative in the first place.

Facing Forward: Concern Over Market Trends

So back to the present: what we're concerned about right now is what the data says about where the market may be going.

We're concerned about things like rising interest rates and ongoing inflation challenges. We're also watching mark to market losses and the effect they could have on the banking sector (see chart below).

I'm also concerned about the effect higher interest rates are going to have as the U. S. government tries to refinance 10 trillion worth of debt in the next 18 months. Plus, trillions of dollars worth of corporate debt and commercial real estate debt that come due over the course of the next three years, which is impacted by those higher interest rates.

Rolling four week period bankruptcies are at all time historic highs. There are more bankruptcies been filed in the last couple of four week rolling periods than at the worst of the 2008 financial crisis as well as the 2000 recession.

More Reason For Caution Than Ambition

Those are all canaries in the coal mine that have us willing to sit a bit on the sidelines. It's enough concern to not fully participate in the upside of the tech bubble that's going on right now. We don't want to have too much exposed and be out over our ski tips when things tip. We anticipate some more volatility over the course of the next two to four quarters.That's why we are remaining a bit more defensive and conservative in our portfolio strategies.

We shifted to a defensive posture in late 2021, which turned out to be very fortuitous timing for 2022. But now, I understand if it's creating a little anxiety because it feels like we're underperforming relative to a tech heavy index. That's not just a feeling, it's a fact. That's why it's all the more important to keep the long view in mind for your portfolio and your plan as a whole.

Our goal is not to outperform the index over every 6 or 12 month rolling period. Our goal is to have a diversified pool of assets that gets you to your goals.

Warren Buffett made the comment at one point that, "It's lunacy to risk what you already have in pursuit of what you don't need." We're not attempting to outperform an index over short sprints. We're attempting to take the amount of risks necessary to help you achieve your goals.

Here at Vizionary Wealth Management, we're always here to help you envizion more. Thanks so much for reading. If you have questions on this or anything else within your portfolio, please don't hesitate to reach out. We're always here to have the conversation.

Advisory services offered through WealthPlan Group, a DBA for WealthPlan Investment Management, a subsidiary Registered Investment Advisor of WealthPlan Group, LLC. WealthPlan Group, LLC is not a registered investment advisor, but is the holding company for WealthPlan Partners LLC and WealthPlan Investment Management, LLC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

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