As if on cue from our last quarterly commentary, risk and market volatility took the forefront in the past quarter. Last quarter we wrote about the fact that the world economy is in transition from a highly leveraged (debt laden) world to a low leverage world.
Our point was that this transition period will be marked by volatility and opportunity. Big changes are afoot. To us, this means we must continue to work to lower volatility in the short-term, while sustaining long-term positions which can reap big gains from the resolution of current issues.
So, what do we do to mute volatility in order to sustain long-term positions? We use two primary disciplines: portfolio formation, and diversification by strategy. Within these two disciplines we have been preaching “conservative balance” as the moniker for our view of the proper way to allocate investments in the current environment. In plain English, what conservative balance means to us is: don’t put all your eggs in a few baskets, and don’t fall in love with one investment strategy.
We have been following these guidelines for investing in a transition economy for a couple years now and are proud to report very good results. In 2010 most client managed accounts captured about 80% of the 12.78% return for S&P 500 with around half of the risk (measured as the standard deviation of quarterly returns). At the end of the third quarter this year, the S&P 500 had lost -10.04% for the year (losing -14.33% the 3rd quarter). While MIFI Wealth managed account clients stand largely between flat and down about half as much as the S&P 500 for the year. One major reason for this resilience in the face of a terrible quarter for stocks is our Active Hedge strategy, which was up about +14% for the year at the end of the 3rd Quarter (and over +20% after the first day of trading in October)!
As a reminder, in portfolio formation we divide the liquid (exchange traded) investment options into seven categories: Fixed Income (Bonds), Equities (Stocks), Commodities & Metals, Liquid Alternatives, Currencies, Real-Estate, and Cash. We then parse this further into Sub-Asset Classes, then into Sub-Asset Class Strategy, and finally by position to be purchased.
As mentioned above, we also believe that diversification by strategy is a key to successful investing at this time. Sometimes you can just go with the market and make money. Our long-term equity holdings will benefit from this type of opportunity. However, in volatile times you want to have options that can balance and smooth negative events.
As investors during this time of transition we believe it is essential to stay diversified and open to opportunities.
One tool we use in the attempt to smooth volatility is the Liquid Alternatives allocation. The primary strategy in this category, which we call the “Active Hedge”, is a short-term investment strategy designed to have the potential to make gains in volatile markets. For the most part, all MIFI Wealth clients have 10%-15% of their portfolio in Liquid Alternatives (unless something else about your personal situation dictates otherwise).
The market has been volatile, and the Active Hedge strategy has had a stellar year so far, with a positive return of over +20% through Oct. 3 (so, not all of the gains are reflected on your most recent quarterly statement). This outstanding return during a negative stock market environment has clearly been a great addition to client holdings this year!
Our conclusion from our last letter remains on the mark, so we’ll close with it again as an ongoing reminder:
As investors during this time of transition we believe it is essential to stay diversified and open to opportunities. Our portfolio management is geared toward the dual goals of mitigating volatility without giving up the upside of investing. We see our Active Hedge strategy, private investments, and insurance options as being important, unique additions to the stocks, bonds and commodities that we build into portfolios. Our goal is to maintain an even-keel as advisors while this economic transition runs its course. We believe this can be accomplished by acknowledging that there will be volatility and mixing stabilizing factors with the pursuit of returns from the new leaders of our economy.
Sol is president of MIFI Wealth. He has over 20 years of experience in financial markets and managing businesses.
Volatility is Back
As if on cue from our last quarterly commentary, risk and market volatility took the forefront in the past quarter. Last quarter we wrote about the fact that the world economy is in transition from a highly leveraged (debt laden) world to a low leverage world.
Our point was that this transition period will be marked by volatility and opportunity. Big changes are afoot. To us, this means we must continue to work to lower volatility in the short-term, while sustaining long-term positions which can reap big gains from the resolution of current issues.
So, what do we do to mute volatility in order to sustain long-term positions? We use two primary disciplines: portfolio formation, and diversification by strategy. Within these two disciplines we have been preaching “conservative balance” as the moniker for our view of the proper way to allocate investments in the current environment. In plain English, what conservative balance means to us is: don’t put all your eggs in a few baskets, and don’t fall in love with one investment strategy.
We have been following these guidelines for investing in a transition economy for a couple years now and are proud to report very good results. In 2010 most client managed accounts captured about 80% of the 12.78% return for S&P 500 with around half of the risk (measured as the standard deviation of quarterly returns). At the end of the third quarter this year, the S&P 500 had lost -10.04% for the year (losing -14.33% the 3rd quarter). While MIFI Wealth managed account clients stand largely between flat and down about half as much as the S&P 500 for the year. One major reason for this resilience in the face of a terrible quarter for stocks is our Active Hedge strategy, which was up about +14% for the year at the end of the 3rd Quarter (and over +20% after the first day of trading in October)!
As a reminder, in portfolio formation we divide the liquid (exchange traded) investment options into seven categories: Fixed Income (Bonds), Equities (Stocks), Commodities & Metals, Liquid Alternatives, Currencies, Real-Estate, and Cash. We then parse this further into Sub-Asset Classes, then into Sub-Asset Class Strategy, and finally by position to be purchased.
As mentioned above, we also believe that diversification by strategy is a key to successful investing at this time. Sometimes you can just go with the market and make money. Our long-term equity holdings will benefit from this type of opportunity. However, in volatile times you want to have options that can balance and smooth negative events.
One tool we use in the attempt to smooth volatility is the Liquid Alternatives allocation. The primary strategy in this category, which we call the “Active Hedge”, is a short-term investment strategy designed to have the potential to make gains in volatile markets. For the most part, all MIFI Wealth clients have 10%-15% of their portfolio in Liquid Alternatives (unless something else about your personal situation dictates otherwise).
The market has been volatile, and the Active Hedge strategy has had a stellar year so far, with a positive return of over +20% through Oct. 3 (so, not all of the gains are reflected on your most recent quarterly statement). This outstanding return during a negative stock market environment has clearly been a great addition to client holdings this year!
Our conclusion from our last letter remains on the mark, so we’ll close with it again as an ongoing reminder:
As investors during this time of transition we believe it is essential to stay diversified and open to opportunities. Our portfolio management is geared toward the dual goals of mitigating volatility without giving up the upside of investing. We see our Active Hedge strategy, private investments, and insurance options as being important, unique additions to the stocks, bonds and commodities that we build into portfolios. Our goal is to maintain an even-keel as advisors while this economic transition runs its course. We believe this can be accomplished by acknowledging that there will be volatility and mixing stabilizing factors with the pursuit of returns from the new leaders of our economy.
Sol is president of MIFI Wealth. He has over 20 years of experience in financial markets and managing businesses.
As Seen In
“Relating to our personal finances can be very destabilizing. Feelings of peace and confidence are often masked by obsession, uncertainty or fear. Most people have developed strong, habitual patterns with respect to their financial lives, including taxes. Mindfulness cuts through these patterns and can allow us to see money matters more clearly, and accomplish positive change.”
Solomon Halpern
“Mindfulness allows our personal experiences, narratives, and emotions to become valuable tools rather than distractions to our financial planning.”
Solomon Halpern
“There seems to be a lack of synchronicity, a separation from the financial self.”
Solomon Halpern
Categories
The Personal Path of Mindful Finance
Being Mindful When It Comes To Money – An Interview with Sol Halpern