MPG Core Tactical 60/40: February 2015 Performance Update

MW-BB798_sm6040_20130422180557_MDDear Mr. Market:

For a guy who is usually full of surprises you’re scripting 2015 like a boring rerun of last year. As you’ll recall we had a rough start to the year with the S&P 500 dipping -3.1% in January but then February came around and erased all the negative returns for the year with a very strong month. As a matter of fact the S&P 500 had its best month in almost five years with a gain of +5.5%. The Nasdaq bubbled up (pun intended) even higher at +7%.

Everything is fine and dandy, right? The media is as giddy as they’ve been in ages. They’re showing us charts and comparisons of Nasdaq 5,000. Nothing could go wrong from here, could it? Is this another perfect backdrop for the four most dangerous words in investing?

It’s different this time”.

It’s without question that the market could continue to run higher. We’ll discuss this and the likelihood of it happening in the last section of this article. First let’s review where we’re currently at and what we did last month:

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (March 2, 2015).

Click here to compare our portfolio against the benchmark

What adjustments did we make?

The following moves were made during the month of February:

2/6/15:         Sold 55 shares of IVV (S&P 500 Index) @ $206.68 ~$11k worth

2/6/15:         Sold 100 shares of VB (Vanguard Small Cap Index) @ $117.59 ~$12k worth

2/19/15:       Sold 336 shares of TGT (Target Corporation) @ $76.98 ~$26k worth

2/27/15:       Bought 100 shares of VEU (Vanguard All World) @ $49.69 ~$5k worth

2/27/15:       Bought 100 shares of VWO (Vanguard Emerging Markets) @ $41.92 ~$4k worth

The above portfolio adjustments were basically made to accentuate an observation that we’ve seen develop many times before. There is a growing sense of frustration with investors; amongst both novice ones and expert financial advisors. The cause of this angst is simply that most people believe their portfolios should be performing better in this record-setting environment. This is 100% due to what we recently discussed in that almost everyone has an inaccurate idea as to how to evaluate and benchmark their portfolio. Unless you were allocated 100% to stocks last year, and in particular U.S. equities, you almost guaranteed yourself underperformance!

There is a shift and a reversion coming but it won’t be capitalized on by the majority of investors. Every cycle in history ends at one point and the passion and blind love for U.S. equities is going to slow and eventually end. Tomorrow’s winners will not be those of yesterday. Write that down and commit it to memory because it’s an ironclad guarantee. Nobody knows exactly when the shift will occur but it will.

Even though the MPG Core Tactical Portfolio is a hypothetical mix of investments it allows us to share adjustments one can make to illustrate our thoughts. We trimmed a bit from two U.S. equity asset classes and added to ETFs in diversified international and emerging markets.

Lastly, we sold Target Corporation (TGT) after it kicked off its quarterly dividend. The dividend was just icing on the cake and of course not the reason for the sale. We sold this stock (as documented in earlier articles) due to a much quicker than expected recovery. In sum, when a stock that was meant to be a slow-growing or deep value play runs up and surpasses your immediate goals, it can be the perfect opportunity to lock in a profit (~30% in this case).

With our standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the last trading day of the month we bought equities and sold bonds:

2/27/15:

  • Bought 87 shares of IVV (S&P 500 Index) @ $212.21 ~$18k
  • Sold 231 shares of BND (Vanguard Total Bond Index) @ $83.10 ~$19k

The MPG Core Tactical Portfolio is still up about +0.46% YTD even though the portfolio is taking about 58% less risk than the stock market. The passively managed 60/40 Benchmark returned +2% for the same period. The S&P 500 is roughly up +2.83% YTD.

Oil seems to have found at least a near-term bottom in the $50 range. The world also has apparently been able to digest the renewed concerns over Greek debt resolutions. International markets are up +5.88% and emerging markets are also up a healthy +4.29% on the year. Most money managers will miss this just like the average investor and continue to chase U.S. equity returns.

Where are we going from here?

Circling back to the main point we’re trying to make here is that not only is a shift going to take place it will likely be one where most people miss the initial run-up. Like almost every other “changing of the guard”, the crowds are almost always late to the party. In 2013 Small cap stocks significantly outperformed Large caps and many investors dove right in. What followed in 2014 was once again a notable lag in performance as Large caps, and U.S. stocks in general, became the “best house to own in a bad neighborhood.”

What is raising red flags and scares us more than anything is when we hear the typical investor feeling as though they “need to get in” and take advantage of this market. That final emotion of not wanting to “miss out on this market” is potential kryptonite to you and your portfolio. The market has been artificially propped up and we’re now witnessing one of the longest expansions in history without a market correction of -10% or more since 2011! We’ve seen this movie before and it doesn’t end well.

“This market” needs to be more than just owning Apple (AAPL) or a handful of leading U.S. stocks. Take heed in knowing that others are beginning to get greedy. They’re avidly searching for better returns. The ‘talking heads’ on their televisions are telling them that “we just hit a record” and they subconsciously assume the “we” actually means everyone. It doesn’t. The media just needs your eyeballs on the tube for a few more minutes, or at least until the next commercial break. This is about Nielson ratings…not your portfolio goals.

Don’t get us wrong here…there is plenty of decent news that should comfort the long-term investor. Yes, many reports of healthier corporate earnings sound encouraging but beware of how this can be misleading. For example, over 80% of companies providing forward earnings guidance have also lowered their future expectations.

All that we’re suggesting is to look in areas that are not being overly hyped. Your first order of business is to of course make sure you have proper diversification. We won’t rehash this topic here but diversifying is more than buying whatever is in front of you or reaching for the shiniest object. Take a look at the MPG Core Tactical Portfolio mix and what you’ll see is a portfolio that will drastically outperform the markets when they get hammered.

Be patient ‘grasshopper’…if there was ever a time to purposely underperform the stock market it is now.

See you next month!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s