November Newsletter 2023

October 31, 2023

^{“Diversification Works”}

At the end of October, we experienced yet another dip in the markets, the third month in a row. This is due to surging treasury yields, geopolitical tensions as well as uncertainties on the Fed’s future interest rate trajectory; all of which has spooked the US equities markets and “capital fear” has been driving the markets and investor sentiment since July 31, 2023. We understand the inevitable market ups and downs, but our proven long-term strategy will prevail.

Throughout our twenty-seven-year history we have used the motto, “Buy Low, Sell High, and Diversify”. Buying low means buying in a down market when a fund or sector is out of favor or has temporarily declined but has future long-term strengths. Selling high means taking advantage of market momentum when the market is up; thus, taking gains off the table before they disappear. This is the definition of active management. Embracing this strategy enhances long-term positive returns and is a prudent process of capturing gains along the way in up markets without taking unnecessary risks.

Now on to diversification, what does it mean? It means reducing risk by owning investments in different sectors, and different asset classes which behave differently in various economic cycles as well as periodically rebalancing the portfolio allocations as needed. The goal of a diversified portfolio is to reduce risk and reduce volatility while still participating in meaningful long-term positive total returns. Diversification does not mean chasing an index or strategy that is not aligned with your long-term goals in either the accumulation phase of building for retirement nor during the retirement preservation and distribution phases. It means your investments are spread out across a range of opportunities in the market while also benefiting from a strong cash flow earned through interest and dividends. On the income side of the portfolio, with CDs and Bonds we create the “ladder” that we use for distributions in retirement. The “fixed income ladder” is built out ahead of time so that distributions are in place well into the future and maturities happen on a recurring basis. By doing this the money is “in the bank” for distributions and we are not required to sell into down markets that come and go to meet planned distributions.

Having a diversified portfolio is a central tenant of Modern Portfolio Theory developed by Harry Markowitz who was awarded the Nobel Prize in economics in 1990 for his work. Modern portfolio theory says that it is not enough to look at the expected return of one stock. By investing in more than one stock, an investor can reap the benefits of diversification—chief among them, a reduction in the riskiness of the portfolio while participating in the market’s growth over time.

By reviewing the ten-year chart below, you will see there is consistency in how the strategy works. In any given year, a diversified portfolio will not match the results of the top sector, nor will it perform at the bottom of the sector, as it is designed to take advantage of the market’s positive results over time. This provides a more consistent and reliable return over an extended period, such as one’s retirement or accumulation period. This diversification strategy provides a thoughtful allocation to a broad array of investment opportunities. This provides a durable portfolio that can weather market conditions and provide meaningful results over your investment lifetime.

The Case for Diversification (Annual Rate of Return)

As to our managed Equity portfolio allocations, our active management approach currently is overweighted toward the Domestic Equity category (Large, Mid and Small Cap illustrated in the chart). Our Alternative Equity category (primarily REITS illustrated in the chart), also has a meaningful active allocation. Both of these portfolio allocations are represented in eight of the ten-year top performers on the chart.

Note the results for the REIT Portfolio did well above the average and our REIT holdings make up the majority of the alternative equity category.

Year-to-date the REIT Portfolio has been lagging behind the Domestic Equity Portfolio based on the impacts of elevated interest rates. However, even this allocation of the portfolio has funds that achieved positive total returns with attractive dividend rates:

IRM (Iron Mountain) 24.17%
STAG (Stag industrial) 6.35%
VCRRX (Versus Capital Real Assets Fund) 2.24%

This past week I spent time in the historic city of Philadelphia and attended the Charles Schwab Institutional annual conference - IMPACT 2023. I spent time learning the latest thoughts from economists, collaborating with peers, talking to venders with valuable solutions to assist a Registered Investment Advisory practice such as ours. Also, I completed education courses and was updated on the latest information on Schwab’s electronic systems and client services. The experience was very positive and of high quality, which makes us very comfortable for the future and our work with Charles Schwab.

As we are adapting to the new Schwab based business center, please call our office with any questions. As we head into the winter holiday season, please stay safe and warm and let us know how we can assist you.

Sincerely,

Intelligent Investment Management, LLP