Brexit and Investor Portfolios

Brexit and Investor Portfolios
July 9, 2016 phillip_toews_1p9l0e9h

The recent vote by the U.K. to leave the E.U. (Brexit) stoked market fears.  Stock markets fell and news headlines brought feelings of uncertainty to investors across the globe.  After falling sharply for several days, markets rebounded at the end of the quarter.  Despite this quick recovery, however, the ultimate outcome of the Brexit vote is still unknown.  Further, this news comes at a time when markets are already under pressure from declining stock earnings and poor fundamentals.

Due to declines leading into the Brexit vote, many Toews models were already in money markets or defensive positions when results were released, and losses during the aftermath of the vote were limited.  However, it’s been seven years since we’ve experienced a decline of more than 20%, and the markets are overdue for a pull back.  Instead of fearing market downturns, investors should understand that downturns inevitably will occur.  So how do investors maintain peace of mind when markets are falling and headlines appear ominous?

Investor Peace of Mind when Markets are Falling

We likely all still have feelings of anxiety when we think back about important tests or other school assignments.  For those that procrastinate (accounting for roughly 98% of the student population), there is a feeling of dread associated with being late and underprepared.  This evolves into guilt and a fear of the unknowable implications and potential poor performance.  The formula is:

Lack of Preparation X High Stakes Event = A Future Career in Commercial Sandwich Production

This is not unlike what investors feel during high stakes market events that have unknown but potentially significant effects on one of the most important aspects of their lives…their financial wherewithal.

Having peace of mind requires understanding that:

1) market losses were likely anticipated and prepared for in the way that their portfolio was constructed, and

2) losses may create an opportunity for profit that otherwise would not have existed.

The first of these messages helps ease the remorse of feeling unprepared for a market event.  The second reframes losses as positive events, rather than events to be feared.

1) Market Losses were Likely Anticipated and Prepared for in the Way That Portfolios Were Constructed

During market drops, investors feel that they have no control over the situation and are uncertain about the extent and duration of negative moves.  Advisors affiliated with Toews, however, tend to focus on active risk management.  As a result, it’s probable that the portfolio that has been built for them anticipated declines and is adapting as markets turn negative to address losses.  This happens in several ways:

Active Risk Managed Equities Strategies

Toews strategies were largely defensive prior to the Brexit vote.  So, likely before investors were even aware that there was an issue, their portfolio had already adapted and avoided large moves lower.

Risk Profile

The amount of an investor’s portfolio that is committed to stocks was determined based on their risk tolerance.  This allocation was decided assuming that markets would fall and potentially enter severe crises.  During stock routs, bonds may perform relatively well.  In other words, far from being forgotten, the fundamental make-up of the portfolio at inception likely took losses into account.

2) Losses May Create an Opportunity for Profit That Otherwise Would Not Have Existed 

Market losses may become profit making opportunities.  To a large extent, success at investing means taking advantage of and often doing the opposite of the crowd.

When markets fall, the crowd sells.  But, if investors understand that lower stock prices are stocks at “Black Friday Prices”, they are able to see opportunity.  Portfolios can be built to increase stock purchases as markets fall.

Active Risk Managed Equities Strategies

If your strategy is defensive or in cash during the bulk of a market fall, it is positioned to potentially be a significant buyer of stocks at bargain prices.  It is key to point out that during market falls, this opportunity would not have existed if stocks hadn’t declined.  The further the market declines, the greater the rebound potential likely is.

Systematic Portfolio Rebalances into Stocks

When portfolios are rebalanced back to target allocations among asset classes, this can mean shifting a portion of bond portfolios into stocks.  This positions portfolios to be net purchases of equities at depressed prices.

Regardless of the precise makeup of portfolios, learning to root for stocks to move lower, rather than fear it, fundamentally changes investors’ perspectives about market drops.  It also goes a long way toward erasing anxiety as market turbulence moves higher.


Prior performance is no guarantee of future results. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.

This commentary may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice.  Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.

This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index.

i Toews All Equity, Growth, Balanced Growth, Balanced, Balanced Income and Capital Preservation portfolios were primarily allocated to cash. Toews Defensive Alpha models were primarily allocated to defensive stocks. Bond portfolios were fully allocated and were not in defensive positions. Toews has other portfolios that were either partially or wholly allocated as well.