Skip to main content

2019 Portfolio Modifications

By January 10, 2019Videos

2019 offers us a new year and a new investment landscape. Let me briefly describe some of the portfolio modifications that we’re going to implement here at Efficient Wealth Management.

Hi. My name’s Paul Carroll. I’m the CEO and Founder of Efficient Wealth Management.

In 2018, we saw a series of negative market events starting with emerging markets at the end of the first quarter. Developed markets followed them down. Domestic markets, not including the “FAANGs” were flat for most of last year. The FAANGs pulled the index up, and then at the last quarter of the year it pulled it all the way back down again. Finally, I mean we were putting out videos and memos about this all year last year.

Global REITs actually managed the year quite well. Domestic REITs got hit a little bit hard. International REITs survived. They’re a little bit of a hedge against currency changes as are most international holdings. So all in all, given the nature of the asset allocations that we have in place trying to maximize portfolio efficiency, we handled the year fairly well.

But how are we going to manage 2019? One of the biggest challenges that we’ve discovered in the last two years is how to better capture these S&P 500 run-ups. Why would this be an issue? Well, we’re a value-oriented shop, and when there’s an S&P 500 run-up, it’s a growth-oriented run-up. There’s some recent research that’s come out through Dimensional that suggests that those growth-oriented companies, that have positive cash flow, if we can isolate them from the rest of the S&P 500, we can actually get persistent alpha, persistent excess returns in that asset class.

The secondary challenge though is we needed to wait for the bubble to burst before we implemented that strategy. This year, in fact this week, we’re beginning to implement that strategy. That bubble has deflated somewhat. It may not be done, but it’s done enough for us to bring in the new core blend asset class that we’re adding to the portfolio. It’s just going to be 5% of equities. Where’s that money coming from? Well, REITs are rich. REITs are the only asset class that haven’t corrected as significantly as all the rest. We’re pulling the 5% out of the REITs in recognition of just the valuation at this point in time.

It’s just a minor modification, and in the big picture what’s most important is that there is an asset allocation, that it is well thought through. Ours have been validated. We sit down with Dimensional Fund Advisors, and go through our thinking to make sure we’re not spinning off into left field. But most important, having an asset allocation, sticking to the asset allocation, especially during times of duress as we’re in right now, are the secret to long-term investment success. We, as always, wish you the best of investment success. Thank you.