Dear Mr. Market:
Apparently you’re kicking off February much like you wrapped up January; in correction mode.
A stock market correction is actually not a bad thing and in this case it’s actually a MUCH needed one. If you’re anything close to being a long-term investor you should be hoping for at least a 10% haircut at some point before 2014 wraps up. Without a breather or some form of consolidation this market has no chance to build a base and move to higher levels by year-end.
If you had a fairly well balanced and allocated portfolio in 2013 you probably looked at your statements and saw that bonds were not just dead weight but rather a huge drag on performance. Not only did the overall bond market lose at least -2% for the year, the proverbial “writing on the wall” was being etched in permanent ink ; bonds had zero upside and only risk associated with them. If rates are to rise, as so many speculate they will, we could see bonds sting investors worse than any other time in history. Bottom line: That’s scary stuff for anyone in the typical 60 / 40 model…
The place to be in 2013 was stocks, but let’s be honest… Did you really trust them to keep going higher and higher? Did a +32% return for the S&P 500 feel “real” to you? Most people we talk to still don’t trust stocks but they ironically weren’t invested in them as much as they would’ve liked. Those that couldn’t resist a record breaking stock market finally cut bait on their bonds. Unfortunately, the reality is that our 5 year stock market party is possibly coming to an end…or at least a healthy pause.
The month of January reminded any investor who has been somewhat awake that one should never completely abandon as asset class. As you’ll see from our current “Core MPG Tactical Portfolio” we are still underweight equities and aside from that slightly defenseive posture the one thing that has us ahead of the 60 / 40 Benchmark is the fact that bonds actually did well in January.
HOW DID WE DO VERSUS A 60/40 BENCHMARK? (Click here and compare)
What adjustments did we make? (If you need to see what we own and how this model portfolio started please click here)
In summation we added a bit more to two core positions and bought two new stocks.
On January 24, 2014 we added 50 shares to the S&P 500 Index (IVV) and 200 shares to our All-World Index (VEU). On January 21, 2014 we opened a 1,600 share position @ $12.05 in Clean Energy Fuels (CLNE). If you haven’t read our recent article on this stock please view it here. (click here) On January 24, 2014 we also opened up a position in Tesla Motors (TSLA) with a buy of 100 shares @ $175.43.
Where are we going from here?
That’s the “million dollar” question (literally in the case of this exercise). Alluding to our earlier discussion points about corrections….while you shouldn’t try to “time the market” or a correction, you should have a crystal clear game plan on what you plan on doing once the bleeding stops. To that end, we do in fact think this is near-term turbulence, and albeit welcomed, it could easily turn into something worse with panic selling or some other added and unforeseen catalyst.
Our main objective for the rest of February is to monitor how strong this correction is. We will likely nibble at areas that are getting hit the hardest. Additionally, we still believe that a rotation from domestic equity strength to Europe is going to gradually occur. Europe still has plenty of issues but when looking out 12 to 18 months we believe it will outperform the United States. Aside from owning the broad index that we currently use for this area (VEU), you can expect to see an individual company name or two added to the portfolio.
Lastly, our clients may see added exposure to Emerging Markets since most of the herd is still running away from them almost like it was 2008 when they were clobbered -53.2%. That same group of “nervous nellies” seems to have a short memory however, as Emerging Markets then returned 79% the following year. We’re not saying this exact pattern will take place but the over exaggeration and swinging of the pendulum is familiar…
See you next month and if you would like to learn which specific stocks are on our immediate watch list, simply input your name and request in the contact form below: