How to position your Portfolio for the Presidential Election and beyond...
Given the lack of volatility of late, investors have reason to be concerned, with the uncertainty plaguing: the presidential election, a definitive answer from the Fed regarding an interest hike, and how to position a portfolio to weather the results of the November election. This month’s issue of The Samra Report will provide our opinion on the direction of the presidential election, a prediction on the Fed’s interest rate decision, and how to position your portfolio given these factors, and beyond.
With the first presidential debate proving no-clear winner, we believe media risk is playing too large of a part in the current assessment of the presidential candidates. With US media predictions aside, we believe the most likely outcome is a democratic win, favoring Clinton (69%) to Trump (28%). Our reasoning behind this prediction:
- During the 2012 presidential race, given the same duration to the election, at this point in time, Mitt Romney trailed Barack Obama 44.4% to 48.2, to the 47.2 to 44.3 lead Hilary Clinton holds over Donald Trump.
- British bookmakers place current odds, after the first debate in favor of Hilary Clinton 4/9, over Donald Trump 7/4.
Given the June surprise of the UK’s referendum vote, our recommendation is to ensure our client’s portfolios are allocated to dampen volatility, regardless of the election outcome. The below chart, strengthens our conviction to overweight Technology, Healthcare and Consumer Materials over the S&P 500, as the chart shows average relative sector performance during Republican vs. Democratic presidents, from 1973 to 2015.
During the September FOMC meeting, a divided Fed held interest rates unchanged. Although not an unexpected move, with inflation and unemployment within the Fed’s target range, and the market up approximately 8% year-to-date, the decision to not hike rates in December, could prompt inflation to climb above the Fed’s target range, given full employment, and signs of higher wages. At Samra Wealth Management, it is in our opinion the Fed should raise interest rates come December. A delay in a rate hike, prompts the question: “is the US economy so fragile, that it cannot tolerate a 25bps raise by year-end.
The Intelligent Investor by Benjamin Graham, the finest publication on value investing, led investors to believe a conservative allocation consisted of a portfolio made up of a 25% equity to 75% fixed-income allocation. Although this may have served investors well up until the turn of the millennium, given the volatility of recent, this advice from Warren Buffett’s Columbia professor is now outdated. The truth is, a conservative portfolio can consist of up to 100% invested in stock, however, this does not hold true for portfolio’s consisting of 100% fixed income, expecting a real-return after inflation, given interest rate risk. Our recommendation to our investors is to use a researched based, actively managed portfolio, positioning their strategy to meet the goals identified by their dynamic financial plan, for their core strategy. There are a few concerns with this approach:
- Research that shows active managers underperforming passive investments.
- Alternative Investments dampen returns as well as volatility
- Benchmarks like the S&P are outperforming retail investors.
The age old debate: Actively Managed vs. Passively Managed... The truth is, in this context, passively managed investments do outperform actively managed investments. However, this argument has gained momentum due to the large media interference, further confusing retail investors. If we take a deeper look into this argument, the question arises: “what is the criteria of an active investment vehicle?” The answer in two parts: (1) the investment is typically, a mutual fund, separately managed account, or ETF portfolio; (2) the investment is named an actively managed strategy, or make mention of an active philosophy in the investment description. Given these parameters, actively managed, does not necessarily mean an investment is actively managed. True actively managed strategies are measured by their active share ratio, a measure in percent, active share represents the portion of portfolio holdings that differ from its benchmark holdings. That being said, true actively managed investment vehicles, those portfolios with an active share ratio of greater than 60% beat their benchmark, after fees, across all markets cycles studied, 62% of the time, with a better downside capture, providing a higher sharp ratio (risk-free return).
At Samra Wealth Management we recommend alternative investments as a method to help dampen portfolio volatility, and to provide our clients with peace of mind, and conviction during market downturns. However, although alternative investments, such as commodities, real estate and hedge funds typically appreciate in value during market downturns, they can also dampen gains during a bull market.
With retail investors typically comparing their portfolio performance against the S&P 500, we advise our clients to instead compare their performance against a benchmark better suited to their risk tolerance. At Samra Wealth Management we create our client’s portfolios to correlate to the risk-tolerance reflected by the client’s dynamic financial plan, and compare returns to the adequate Dow Jones Relative Risk Index.
All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor.