Experienced investors know that financial markets can shift quickly. In early 2016, investors were focused on protection from their stock exposure, but following the U.S. presidential election that year, the market momentum strongly favored equities.
Protection from Bonds
Historically, the best portfolio protection from a stock market crash has been Long-term Treasuries (TLT) because these bonds often rise the most when stocks fall materially. However, given the recent jump in interest rates, investors are in an environment that may require “protection from their protection.”
At ETF Portfolio Management (ETF PM), we offer a range of balanced “risk parity” portfolios, via the investable benchmarks, that provide sample solutions for each of the four main types of investors (risk profiles): Income, Income & Growth, Growth, and Aggressive Growth.
Think of the four investor risk profiles as “small, medium, large, and extra-large” with regards to your target risk/return levels.
Given the recent weakness in bonds (TLT) and real estate (REITs, VNQ), we have temporarily shifted our investable benchmark holdings within client accounts, moving the bond exposure to cash, and the real estate exposure to semiconductors (SMH). While these trend following shifts are intended to be temporary, we cannot predict how long we will deviate from the standard investable benchmark solutions.
Nobody can accurately predict if long-term interest rates will continue to increase materially, and/or the timing and impact this will have on equity prices. Therefore, ETF PM is always prepared to raise cash as needed, throughout our respective client portfolios, to maximize investor principal protection.