Occasionally, we get asked about buying a low cost diversified mutual fund instead of having PPA do the investments. It’s a fair question, and in the end people are looking for value. We seek to listen and understand our clients and to help them make the best decisions they can with the information they have. We could also point out that along with investing a client’s money, we also act as a financial coach, educate, keeping you on course for your goals, and set up and maintain the financial plan, but I don’t think that really fully answers the question. Ultimately, the question is more focused on is it important to have a portfolio that changes, or would it be better to just ride the market and save the cost.
We don’t have a crystal ball, however, we can make educated guesses about what part of a market cycle we are in and potential risks. Markets have cycles from expansion to growth, and downturn to contraction. This last market cycle has had an abnormally long expansion and growth. Most cycles are about 6 years apart. Low-interest rates and pro-growth policies have extended this most recent portion of the cycle for 10 years. Still, it seems clear we are in the latter innings of the growth cycle. How much longer we go is anyone’s guess. We expect a sideways market through the end of the year, with a negative bias after that. We posted a Guggenheim Investments projection in earlier commentary, projecting the next recession for late 2019. Markets will anticipate a recession and attempt to react about 6 months earlier.
Our investment models attempt to respond to market signals. We generally risk up when times are good and risk down as conditions deteriorate. This means in the beginning of a downturn, these models might feel it more, initially, but decrease risk exposure as the momentum weakens. Many of our models are currently fairly defensive, although not all. It’s too soon to say if this is this is the end of this cycle and we might continue sideways for a long time. What we are seeing groups like T.Rowe Price suggest a downturn in 1-2 years and other buy and hold managers explain away the more recent downturn as a short-term dislocation. On the other hand, we see many trend based managers moving heavily to cash, and their projections appear very pessimistic. There is a difference of opinion between the traditional fund investment groups and the trend managers. We think now is a good time to act with caution. I have attached a publically available youtube video from one of our trend based research firms. To put their projections out publically puts their reputation fully at stake.
Watch the video now: Click Here
Two screenshots off the video, which show short term and long term projections:
If the trend managers are correct, then static diversified funds will feel their full share of the downturn. PPA seeks to protect clients better than these static models and have longer term better risk-adjusted returns.
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