The current stock market bull has lasted longer than normal, yet it continues to rise. After stock market advances, it’s tempting to move a bigger portion of our portfolios into stocks or other risky assets. What’s the best way to position our portfolios, and our mindsets, near market tops?
First, we should acknowledge that even if markets are overvalued, that doesn’t mean that they can’t continue higher. So portfolios should be positioned to move higher if markets do. That means maintaining allocations to strategies that have some stock market exposure. However, especially during the late stages of market gains, they should be designed to avoid losses if markets fall.
Second, we need to remember that investing is counter-intuitive. We learned crowd-following behavior as a natural part of our evolution. As predators, not following the group and reacting to a newly available feast meant missing out. As prey, not fleeing with the crowd had even more dire consequences. The problem is that we haven’t evolved fast enough to keep up with our rapidly changing environment. To best manage our behavior, we need to train ourselves to do the opposite of what the crowd does. And the crowd tends to buy near market tops, and leave risk management strategies after extended bull markets.
Finally, we need to remember that the impact of today’s decisions effects next year’s returns, not last year’s results.
Each strategy in your portfolio plays a specific role
Our tactical strategies attempt to provide market gains, but introduce elements of loss avoidance if markets fall. If you hold long only, buy and hold strategies (typically not managed by Toews), these attempt to match market performance more reliably, with little or no loss avoidance characteristics. Finally, our tactical fixed income models attempt to increase yields, but defend against a bond market downturn.
At any time, it is likely that one or more of these strategies is trailing and others are potentially performing better, and in late stage bull markets, risk-managed strategies tend to trail buy and hold positions. However, if we’re in the late stages of a bull market, and we believe that we are, it’s more important than ever to maintain allocations to tactical/risk managed strategies, as what lies ahead may be starkly different than what has just occurred. In fact, if risk-managed/tactical strategies have trailed recently, they may perform strongly if markets falter ahead.
How to View Further Market Gains
By many measures, markets are overvalued. Yet, they have produced gains. If they continue higher, let’s think of it as free money. Our recommended course of action is to rebalance portfolios back to target allocations and add to risk managed positions. But especially if markets trend higher, it’s important to keep risk managed strategies intact.
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 www.toewscorp.com. 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.