In our last commentary we discussed the importance of risk management for clients. Before October, we made two critical changes to our risk overlay models and began to take profits off the table along with reducing risk. Since then, we have lowered risk three additional times in our models. With the risk-prudent management actions, we have also left adequate equity exposure to participate in any possible 2019 gains. We cannot predict what the market will do, but we can measure reward against risk and make the best decision at the time.
The major U.S. indexes have sharply dropped to negative territory for the year, much different from the strong returns seen in 2017. The S&P 500 is down about 8.5% for the year, as we write this commentary. Taking a quick look at the rest of the world shows that most International Developed and Emerging stock markets have fallen down 10% or more. Bonds have also had a below average year. With Central Banks hiking rates, bond prices have been under pressure from rising yields. In this challenging 2018 year, just about every single asset class an investor can invest in has posted negative returns or unchanged performance year to date. This includes stocks around the globe, government debt, corporate bonds, and even commodities.
The TCG risk model was designed to be dynamic and adapt to market changes and corrections. As we designed your investment portfolios, we have a portion of your portfolio in equities (stock market) and a portion in fixed income (bonds). Historically, equities come with higher returns but also higher risk. While fixed income typically generates lower returns, it also exposes to lower risk than equities. As we experience markets like we have seen recently and anticipate further declines, we typically want to shift client portfolios to a more conservative stance. By doing this, we are dynamically adjusting the risk in your portfolio to help reduce any additional losses the stock market may have.
Recently, the dynamic piece of our investment model has moved to a more conservative stance and has made these changes in response to stock markets negative performance this past quarter.
Below is the S&P 500 for the year 2018. The arrows point to different times this year we have made changes to take risk off the table.
Risk management is often the missing piece to most asset allocation portfolios. An only buy-and-hold approach isn’t enough to tackle your investments; that’s why TCG diligently monitors portfolios and allocations, and you should too.