Navigating Portfolios Through a Difficult Investment Climate | ETF Trends

Note: This article is part of the ETF Trends Strategist Channel

By Rick Vollaro

Tactical managers must maintain a big picture view, and then find ways to invest with that perspective over a multiyear time frame. One of the most challenging aspects of this task relates to the dizzying array of analysis and opinions we digest each day, particularly in a world where updates of all sorts are monitored on a cell phone within seconds of occurring.

In order to escape from the daily noise pollution, we must constantly step back and assess markets from fifty thousand feet, where the short term clutter is replaced by a clinical evaluation of different investing disciplines that we follow (business cycle analysis, technical conditions, valuation, monetary policy, quantitative evidence, and independent research evaluation). When viewed through this prism, we see the worrisome combination of an aging and expensive bull market, a slowing economic and earnings backdrop, and a technical profile that continues to deteriorate beneath the surface. To sum it up, we believe that the current macro environment suggests that a cautious approach to investing is best right now.

Given a guarded view of the markets, there are multiple ways for us to apply our view to our portfolio construction. The first is to simply alter the asset allocation of the portfolios that we manage. This requires us to alter the amount of equities, fixed income, and alternatives we hold in our portfolios to get in line with ever changing market conditions. Because we run flexible portfolios that use a high percentage of exchange traded funds, making targeted adjustments in the amount of equities and other risk assets (ex. commodities) is a simple way to lower the volatility. Amazingly, some investors won’t give themselves the ability to move the asset allocation of a portfolio due to their belief in an efficient market theory that we consider outdated and inaccurate. At Pinnacle we believe that markets are supremely inefficient by nature, and that giving ourselves the flexibility to change asset classes due to changing market conditions is grounded in simple common sense.