By John Lunt, President of Lunt Capital Management, Inc.
“The key to keeping your balance is knowing when you’ve lost it.”
As we approach the end of 2016, investors will ask the question: “Do I have the right balance in my portfolio?”
A follow up question for each investor could be “What are we balancing between?”
The answer requires identifying the appropriate trade-off (balance) between risk and return, between market risk and strategy risk, between correlation and magnitude, between U.S. and international, and between offense and defense just to name a few. There are times that the market waves seem especially fierce, and it is easy to lose portfolio balance. At other times, the waves seem easy to ride. These lulls can be especially dangerous, as it creates a tendency to relax and ignore proper technique. This makes an investor susceptible to even minor, unexpected volatility.
In the recent past, it was difficult to create balance in portfolios because of the inability to efficiently access a wide array of asset classes and strategies. ETFs have been a game changer—portfolio balance is now within reach. ETFs facilitate the creation of portfolios with the right balance, as index-based ETFs are transparent in holdings, costs, and methodology. ETFs provide the ability to target both broad and specialty allocations. The fact that they are traded on exchanges allows for their use in risk-managed and return-seeking strategies.
What does balance mean? Each investor is unique, and balancing tradeoffs will vary based on objective, risk capacity, financial condition, and time horizon. It is valuable to highlight what portfolio balance does not mean. It does not mean always using a pre-packaged investment product with “balanced” in its label. This may or may not bring appropriate balance to an investor. A balanced portfolio does not mean a 50%-50% split between the two elements that the investor is trying to balance between. In other words, portfolio balance does not connote equal. Imagine standing on a surfboard. As the waves and tide move below, an experienced surfer will shift his or her weight in order to keep balanced and remain standing on the surfboard. Careful, thoughtful investors will shift the balance across key elements within a portfolio in order to navigate specific market waves, currents, and tides.