December 12 2018 Market Update

Why are we Rebalancing?

November offered a strong reminder of why we diversify: a significant selloff erased a year’s worth of gains on November 20^th on growing fears around the technology stocks, regulation, trade, and economic prospects going into 2019.^[1] Just as quickly, accommodating language by Federal Reserve Chairman Jerome Powell later in the month soothed markets, and in the last week of November the S&P 500 Index gained 4.8% and the DOW Jones Industrial Average increased 5.2%.^[2]

Uncertainty is also heating up in bond markets. Yields on 5-year Treasury notes recently dropped below those for 3-year Treasuries for the first time in over a decade. This is largely considered an early warning sign for the economy, as “inversion” of the yield curve has occurred prior to each of the last seven recessions.^[3]*

But it’s important to remember that the rebalancing trades we recommend are not driven by short term market news. In other words, the rebalancing process is not simply a response to the market environment. It’s a realignment of your portfolio with your long-term investing strategy.  

Here’s a look inside the rebalancing and tax loss harvesting process, and what it might mean for you.

The Basics of Rebalancing

You have undoubtedly heard us say – probably countless times if you’re a longtime client – that discipline is a critical part of your investment strategy. At JSF Financial, we don’t chase returns; we pursue results.

Results come from taking a methodical approach to investment management: carefully building a diversified portfolio that is designed to capture returns from different asset classes and shield you from their risks.

By diversifying and allocating investments based on empirically validated long-term performance (rather than short-term returns), we can focus on making the most of your strategy, and you can avoid the pitfalls of getting distracted by short-term volatility – namely the temptation to try to time markets.

Click to view full size

Maintaining discipline means committing to rebalancing. As you accumulate returns in some asset classes and losses in others, the balance of your asset allocation will shift. For example, a portfolio with a 55% equity allocation might reach 65% in equities in a strong year – or drop to 45% in a weak one.

When we rebalance, we buy and sell in a way that brings your portfolio back into alignment with the investment strategy we built together. This serves two purposes:

First, it positions us for the future. Rebalancing provides an opportunity to harvest gains in high-performing asset classes, which takes money off the table and reduces your exposure to a potential downturn in that asset class. In simplistic terms, it can help us “sell high.” Rebalancing also provides a mechanism to put money to work in lower-performing asset classes. In layman’s terms, that means it can prompt us to “buy low.”

Second, rebalancing helps focus on the appropriate time horizon. We know what long-term results we want to see from the portfolio, and we’ve analyzed the portfolios to generate an asset allocation that we believe can deliver those results. By rebalancing, we’re staying in line with the big picture strategy.

Tax Strategy

There’s another useful reason to rebalance: managing your year-end tax bill. No investment strategy operates in a vacuum: every investor faces costs, and taxes can be among the largest – especially for high-net worth investors in non-pension accounts.

Our rebalancing strategy for your portfolio takes this into account. For many clients, we work directly with an accountant to determine how our investment management activities can support overall tax efficiency. When rebalancing, we make tactical decisions about which funds to buy and sell based on the potential for tax savings.

Click to view full size

It’s important to keep in mind that each client is different: we tailor your rebalancing recommendations to your specific tax situation, your investment strategy, and your overall financial needs and goals.

Rebalancing in Volatile Markets

Of course, if you’re like many investors, the prospect of rebalancing just as markets are falling or volatile can be intimidating.

But this is part of the discipline of investing: we avoid timing markets and chasing short-term performance because we know that it simply does not work for the long run. The math shows that this approach isn’t worth the risk or the costs.

By methodically implementing your investment strategy, we’re looking to balance your exposures to the good, the bad, and the ugly in any particular asset class. This is an approach that has stood the test of time, and it’s our view that it’s the best way to pursue your investment goals.

Don’t Hesitate to Reach Out

You’ve likely already heard from us or will speak to us soon about year-end strategies for your portfolio. But please always feel free to reach out with your questions and concerns. We’re here to walk you through the process and guide you at every step of the way.

On behalf of all of us at JSF Financial, our thoughts and prayers are with those of you who have been affected by the California wildfires, and we offer our thanks to the firefighters and first responders who put their lives on the line to keep us safe.

Finally, as the year comes to a close, we’d like to express our sincerest appreciation for the trust you have placed in us. We appreciate working with you and hope that the holidays and the coming year will bring happiness and joy to you and your family. We look forward to seeing you in 2019!

JSF Financial