Client News

Have You Put Snow Tires on Your Portfolio?

“The first thing you have to know is yourself. A man who knows himself can step outside himself and watch his own reactions like an observer.”
-Adam Smith, The Money Game

I was thinking about the markets and our portfolios last week on an early morning drive up to McCall.  Fresh air and sunshine to clear the brain.  Driving a solid, if eight-year-old, rig; ready for the season with studless snow tires and traction control, I found myself pulling over to let an empty logging truck charge past.

The road was wet, the temperature was 29º, black ice may have materialized in any corner.  The logger was driving faster.  His old Peterbilt was leaning hard in the turns.  I wondered if he considered the risks.

We put the snow tires on our portfolios last year.  The fund models were rebalanced to bring the bond allocation back to target.  Investments in markets that have run up were trimmed to add to those which have been out of favor.  We increased our bias towards value stocks and companies with consistent profitability versus those that have been on a tear.

These moves were not designed to “get there” first.  These adjustments were made with the idea of staying on the road.  As measured by the S & P 500, stock prices have increased by more than 200% from their lows of 2009,1 our balanced portfolios made new highs in 2011 and have continued to grow.

With this sunny road behind us, what lies ahead?  Hopefully the deicing machine works as hoped and we have a nice smooth ride.  Unfortunately, unlike the trip to McCall, we are on a brand new road.  There is no map and no one has driven it before.  The unprecedented growth in the Fed’s balance sheet coupled with the Zero Interest Rate Policy has not yet produced the desired result of a strengthening global economy.  The desire for a little bit of inflation is still threatened by the deflationary pressure of the huge public debt which holds back the economy and crowds out private investment.

The way forward as discussed in the October newsletter is tax and regulatory reform, lower corporate income tax rates and a rework of our byzantine tax structure.

Happily, we have received the equivalent of a tax cut through lower fuel prices.  This market driven event is a very positive development for the main street economy.

At Rathbone Warwick Investment Management, we are driving forward into 2015 on this new road.  Nothing was ever gained by staying home.  We are optimistic that it is going to be a good trip, but we have our snow tires on and are ready in the event the road becomes slick.  If you would rather ride in the logging truck, we should talk about that now.

Robert W. Rathbone
Investment Advisor

1The S&P 500 Index returned 13.69% for 2014, while the Russell 2000 Small Cap US Index was up 4.89%. The international index MSCI EAFE lost 4.90% for the year.  Emerging markets, as measured by the MSCI EM index, declined 2.19%  (Bloomberg).