Letter to Clients {Conclusion}

Today we are publishing the conclusion to the letter we sent to our clients last week.

What should investors be doing?

Investors should understand that volatility is part of the stock market process.  That’s again why you should understand and be comfortable with your individual risk/reward criteria. In general this is what we as a firm are doing now for our clients and some of the things others should be aware of in their portfolios.   

1.  Know what you own and why you own it.  Check to see if you're comfortable with your portfolio's asset allocation. 

2.  Know your investment time horizon.  Think about portfolio and market allocations differently if you are one or two years away from a major event like paying for college or retirement than if you have a 10 or 15-year time horizon.  Probability suggests that despite short-term movements and volatility the longer view on equities is still positive.

3.  Look yourself in the mirror and ask these questions.  “What's going to bother me the most?  What will keep me up at night?  Am I comfortable watching the markets grind lower and perhaps seeing double-digit losses in my portfolio sometime this year?  Or will it bother me more to raise cash and see the market move higher?”  Nobody can answer this but you.  Please let me know immediately if your feelings on this have changed.

4.  De-risk your portfolio.  Get it to a place where you're comfortable with your investments.  My primary method for de-risking is to raise cash.  Cash may not pay much right now but sometimes earning next to nothing beats losing money.  I have raised cash in certain client accounts this year although I would note that these amounts may vary depending on a client’s risk/reward profile.  These levels are such that I believe my clients will still participate in much of the market's advance should stocks continue moving higher.  Cash should also help cushion a market decline and give us the opportunity to find value should a market correction occur.  That's something I'm comfortable with as are I believe my clients.  It is often easier to make up opportunity than losses.  

5.  Diversify your portfolio.  Don’t have too many eggs in one basket.  I monitor positions in terms of individual security size and in terms of asset allocation.  Exchange Traded Funds  {ETFs} help with diversification, although they will not stop portfolios from declining in a period of market weakness.

6.  Do your homework for better days.  Markets may have flat lined but there are sectors of the market that are starting to look attractive for further investment.  One of the reasons besides prudence to raise cash is to be able to deploy it when bargains appear.   I believe we are starting to see some early evidence of this.  The sectors that are catching my eye may not advance right away and will likely decline along with most every other equity or ETF during a period of higher market volatility.  However,  analysis of these sectors gives me comfort of their longer term potential.   My preferred investment vehicle to buy into markets and sectors with ETFs.