MPG Core Tactical 60/40: July 2014 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

Have you ever woken up long before your alarm clock was set to go off? Put yourself in that state of mind for a minute. You see the alarm clock, take a pleasant mental check that you still have some time to sleep and you pleasantly roll over and shut your eyes; it’s almost like you just were rewarded free time which is the one thing we can never get back!

CLANK, BANG, SCREECH, HONK!?!?! What on earth?? Something that is NOT your alarm clock rattles you awake and spoils this momentary feeling of pure relaxation.

That’s basically what Mr. Market did to everyone in July. The last day of July brought people a wicked reminder of what the market can do if you let it put you to sleep. We haven’t seen a sharp drop like this in a few years and it certainly got your attention, didn’t it?

We actually saw a rather sharp selloff in some of the technology and momentum stocks in April of this year but this time it is broad based and appears to be signaling something more. Before we talk further about the markets and how they may have finally awoken some of you, let’s refresh our often short-term memories on why we run this monthly series of articles.

Click here to revisit the first edition of the MPG Core Tactical 60/40 Portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (August 4, 2014).

Click here to compare our portfolio against the benchmark.

What adjustments did we make?

One thing we try to avoid when it comes to managing money is to “pat yourself on the back without breaking your arm”. We did very little this month aside from clearly communicate that we thought not only was the stock market ready to correct but we also laid out what we planned to do about it. Read and click here to see exactly what we said. The moves we made in advance of the worst down day of the year were as follows:

7/29/14:       Sold 59 shares of VO @ $118.20 (Vanguard Mid Cap ETF) (~$7k total).

7/29/14:       Sold 59 shares of VB (Vanguard Small Cap ETF) @$113.90/share (~$7k total)

7/29/14:       Sold 20 shares of IVV (S&P 500 Index) @$198.71/share (~$4k total)

These are small adjustments which equate to us simply reducing equity exposure and overall risk to the portfolio. They are not massive moves and nor should they be. Trying to be too tactical is flirting with being a “market timer” and we have yet to meet someone who is successful at this gamble for more than one market cycle. If you find one please introduce them to us!

Lastly, we bought nothing with the proceeds from these sales. We’re somewhat heavy in cash right now and that is by design. What’s more important than the size of these moves is the fact that they were actually made. Anyone can buy a stock or fund with the hopes of it going up; very few ever have the discipline or strategy in place to know when to sell. We did and if you’re ever wondering when we actually make these moves, follow us on Twitter. You can see a ton of information here but also screen for specific news on what moves we make in real time by searching for #MPGTactical. While you’re at it…”like” us on Facebook too! Heck…you might learn something while enjoying stuff that is not regurgitated from a young social media intern who goes back to college next month.

As for the standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the first trading day of the month we bought more equities with proceeds from bonds:

8/1/14:            Sold 152 shares of BND @ $81.92 (Vanguard Total Bond Index)

                      Bought 13 shares of IVV @ $193.74 (S&P 500 Index)

As of this writing the MPG Core Tactical Portfolio played tremendous defense and has closed the gap considerably with its benchmark. It dropped like everything else did but is still up +3.51% YTD. The passively managed 60/40 Benchmark is up +3.35% YTD. The S&P500 gave back some of its 2014 gains and is now at +6.13% YTD. The Nasdaq still leads equity indices at +6.57% YTD.

Lastly, although the investment world was quick to write off bonds…they obviously still hold a place in a portfolio. Hopefully July reminded people of that as the bond index is tracking at +2.27% YTD.

Where are we going from here?

Don’t put too much weight on what economists are predicting. The track records of almost all of the best and most renowned economists are absolutely dismal. In 2009 there was a study of 77 different national economies and 49 of those were in a deep recession. Guess how many economic forecasters had predicted a recession the previous year (2008)? Zero. That being said, people are like sheep and they will still make emotional and shortsighted decisions based on what the next economic forecast reads.

Nobody enjoys seeing a market correction but if we ever needed one…it’s now. We believe it has begun and without intending to sound negative…we hope it follows through. The S&P 500 has gone over 34 months without a -10% decline. Markets have averaged at least one correction every 12 months and it’s a necessary evil in order for prices to reset and continue higher. The bull market is not over but it will be if we don’t get the rest of this correction underway!

It’s not that we’re necessarily headed for a stock market crash; we will always have the media tell you that and plague your brain. Fear sells and it’s easier to spew than other optimistic viewpoints. Our mission is not to take one side over another but rather find the course that is the most stable in what is setting up to be potentially even more of a bumpy ride. The bottom line is that this stock market is tired.

July saw the markets get hit with several geopolitical events. (Unrest in the Gaza strip, more fighting in Libya, a downed Malaysian plane over the Ukraine etc) With all that to digest, decent earnings still continue to help keep the Band-Aids on of a looming debt bubble from being a major headline. That day is coming but for now we see a market that is simply frothy and struggling from a technical standpoint. There are a decreasing number of stocks participating in the overall market advance. This negative divergence is showing up in several areas and is a near-term cause for concern. Couple that with more weakness in the Russell 2000 (small cap stocks) and you have a red flag warning which is why we are playing defense for a while longer.

For now …don’t worry too much about any near-term interest rate hikes. With that being said you can still sleep fairly well at night by keeping some high yield in the bond portion of your portfolio. Stay lighter than normal in equities and if you haven’t finished preparing your shopping list as we recently suggested…what are you waiting for?

See you next month!

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