The Big Question (No, I Mean the Big Question) and Portfolio Tweaks

Steve to be used for Investment stradegy update.jpg

The Big Question (No, I Mean the Big Question) and Portfolio Tweaks

The last two months have been the most incredible time for the world that I have seen in my 56 years.  I imagine that’s the same sense many of you have, including those of you who have me by three or even four decades.  Who would have thought in early March that we would literally shut the world down to try and stop the progression of a virus?  I know people have pointed to movies that were eerily prescient to the situation we find ourselves in, but since I’m not a movie buff I haven’t seen them.  The global health responses to the virus have varied and the success of those responses has varied as well.  On the economic front, the news is terrible and getting worse by the day. Over 33 million people have filed unemployment claims, more than the total number of jobs created since the financial crisis in 2008-2009!  While it is hoped (or assumed) that many of those people will almost immediately go back to work when restrictions are lifted, it is likely that a lot of small businesses won’t reopen at all and many larger companies are rethinking their operating and hiring plans.  The markets, after plunging in late February through March, have staged a valiant comeback despite having gone sideways the last couple weeks.  Many market participants fear this is/was too much too fast.  Others are calling for the next bull market.

All of this taken together creates, in our opinion, the greatest uncertainty in modern times.  Here is just a sampling of the significant questions that play into the uncertainty:

  • When will restrictions be lifted?
  • Will lifting restrictions cause a second wave of infections?
  • How many people ultimately will die from this virus?
  • When will a vaccine be ready and will it be effective?
  • If restrictions aren’t eased soon and rapidly how will it affect the economy?
  • Will the economic recovery (when there is one) be V shaped, W shaped, U shaped or L shaped?
  • Will the Federal Reserve be able to keep the markets functioning properly?
  • Will the markets retest the March 23 low? Or go below that?
  • Will the government provide trillions more in borrowed money to keep people, businesses, and the economy afloat?
  • How will the government ever pay this money back? I know that’s an ongoing question but of more importance today.

These questions are all integrally related and right now we don’t know the answers to any of them.  Restrictions may be the exception, at least in the early stages, as some states have started, and our state of North Carolina is beginning a three-phase plan this week.  As questions are answered, it will lead to great debate over the effectiveness of the actions taken.  Much of that will be with the benefit of hindsight.  But history will judge this moment as perhaps some of the most important decisions ever made at the federal, state, and local levels.  Quite frankly, I’m thankful that I’m not a politician right now!  Even though most of my career has been spent making decisions with incomplete information involving peoples’ life savings, at least those decisions aren’t judged in the court of public opinion nor will they be written about in history textbooks.

The Big Question

With that said, we haven’t gotten to what we believe is the big question.  Despite the concern you likely have for people infected with coronavirus, and the families of those who have died from it, despite the concern you have for family members whose lives have been upended from a job layoff or their business closed with no way to pay their bills, and despite your concerns over the future of our country, the big question is how does this directly affect you and your financial plan.  If that sounds a bit selfish, perhaps it is but understand that at IronGate we serve you!  We don’t serve the markets, the economy, the Fed, or the government.  All those other questions are important but frankly, they are just noise when it comes to serving as our clients’ personal CFO.  Sure, we ask each other questions like those all the time.  We build plans and portfolios with questions like those in mind.  But when the world gets turned upside down, especially in a very short period of time, we need to know if the planning and building have worked for you.

To answer that question, at least from a broad perspective, we did a sampling of clients who utilize our full spectrum of CFO services.  That sampling looked at their financial independence success rate prior to this crisis and compared it to what it looked like around the market’s bottom. The overwhelming majority of those clients sampled showed no material change in the probability of their success well into the future.  While the market value of their portfolio isn’t the only variable (rate of spending, inflation, assumed longevity are also factors), it was the only one we changed for this analysis.  So, despite our inability to answer many, if not all, of the questions I posed earlier at least we know that our clients are still in excellent financial shape for the future.  If you would like to discuss your personal situation, please give us a call.  And, if you don’t work with us and aren’t sure how this crisis has impacted your future, we’d be happy to discuss how we help people like you answer the big questions.

Tweaks and Taxes

Despite not being able to be in the same room together for almost two months, our investment team has been busy analyzing our portfolios to see how things held up and if changes needed to be made.  Admittedly, we’ve had a few surprises.  Mainly that certain areas of the bond market are still not where we hoped they would be, especially after the Fed’s all-in approach to easing the crisis.  Something you have to know is that generally speaking, the bond market is forward looking.  Many people even say if you want to know what’s going to happen to the stock market look to the bond market.  That, of course, is an oversimplification but isn’t the worst advice I’ve ever heard.  The bond market is still in pain and is healing slower than expected.  Perhaps that advice I mentioned could be true this time despite the significant recovery in stocks during April.

With that said, we are patiently waiting for some more healing in the bond market before making any changes to our bond holdings.  We did, however, tweak some of our stock market exposure based on some surprises there.  One is that despite the significant differential in valuations, growth stocks have continued to outperform value stocks by a huge margin but we believe this won’t change in the near future.  A big reason for the performance difference is that energy and banking companies have suffered tremendously, and they are value stock stalwarts.  However, several of our more value-oriented holdings have done well because they are focused on companies consistently growing their dividends.  While dividends themselves are already taking some hits as companies circle their wagons to preserve profits (if they have any), many of those companies (think Costco) are prospering during this time.  So, in our more conservative strategies, we shifted some allocation to more dividends, and in our more aggressive strategies, we shifted some from value to growth, mainly in the international area.  We also bumped up our exposure to healthcare stocks in two strategies as that sector is looking to benefit from the pandemic.

We also replaced our small/mid-cap manager with a fund that had an excellent track record in a separately managed account structure before adding it as a mutual fund last year.  This accomplished two things.  First, for everyone we believe this will provide better risk adjusted returns in the small/mid-cap space going forward. Second, for clients in taxable (ie non-IRA) accounts it allowed us to harvest some losses to offset capital gains.  The change in our international holdings also accomplished that for non-IRA accounts in our two more aggressive strategies.

We continue to digest volumes of research from some of the best (and independent) minds in our industry, asking lots of questions (including the ones above) and looking for ways to improve our process, all with the goal of giving you the confidence that when things look bleak and there are tons of unanswered questions, at least the big question for you can be answered: “you are still in great shape and are going to be fine.”  So, continue to stay safe and if there is any worrying to do (at least regarding your money), let us continue doing it for you!  As I said before, please call us if we can help.


Steve Coggins
Chief Investment Officer

IronGate Partners is registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of Hightower Advisors, LLC, or any of its affiliates.