Why now is the right time to rebalance risk and protect your portfolio
Horror movies are frustrating to watch. Invariably, young co-eds cozy up in cabins and cars oblivious to the dark forces lurking just outside.
Why do they do this? We all know what’s going to happen next. Fangs, screaming, blood and then the end of life as we know it.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
Reminds us a little of how investors are treating the current bull market. We all know it can’t last. But are we taking action to protect ourselves or do our portfolios resemble an all-you-can-eat risk buffet for the approaching fiends?
Time to rebalance
With the end of the year approaching, now is a perfect time to take stock of whether you’ve properly diversified your risk.
After 8.5 years of bull market gains, you might have much more stock exposure than you realize. What’s more, your fixed income allocation may no longer be providing an effective defense either.
Now take a look at your alternatives sleeve. Are the assets you rely on to diversify your portfolio under the thrall of creeping correlation? For most advisors, the answer is yes.
Longboard research shows most financial advisors cannot identify the three diversifiers that historically have provided the lowest correlation to the stock market: gold, MLPs and managed futures. Instead, they’re invested in assets such as REITs that have nearly 60 percent correlation to the stock market.
Rebalancing should be easy
Luckily, your end-of-year rebalance will help you sort it out. But what you have to do next may seem as unpalatable as wearing a garlic necktie or donning a wool turtleneck in summer.
You have to reduce exposure to the strategies that have outperformed during the year. In other words, sell high. Then you have to increase allocations to those strategies that have underperformed, or buy low.
If you do this consistently, history suggests you will have better long-term performance with a smoother ride along the way.
This should be as easy as telling Count Dracula you already gave at the blood bank. But as humans, greed sometimes get in the way.
Our advice: rebalance now and put a stake in short-term decision making.
Article by Longboard Funds
