Are You Capitalizing on the Investment Mistakes of Others?Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on March 25th, 2016
In recent months my colleagues and I have spent considerable time talking to clients about what not to do in the face of the recent market volatility: don’t panic and abandon your asset allocation strategy.
As we say all the time, your asset allocation and return on behavior (avoiding buying and selling mistakes based on temporary swings in the market) are the main drivers of investing success.
Behind the scenes, our Investment Policy Committee, along with Rogerscasey, the investment research firm we’ve hired to enhance our ability to identify asset allocation opportunities, have been analyzing asset classes to reduce portfolio risk without decreasing expected returns.*
We believe we’ve found this opportunity: decrease overall exposure to U.S. and Developed International equities while shifting to opportunities in emerging markets.
This strategy is consistent with our Evidence Centered Investing philosophy that investors should look for depreciated asset classes and buy them when "the herd" has oversold out of fear of further losses; and sell asset classes that are above their historic highs when the herd is has overbought out of greed.
Emerging market equities are now “cheap” relative to U.S. equities and developed market equities. The charts below illustrate this (explanation beneath):
*Rogerscasey, Emerging Markets 2016, Feb. 3, 2016
The chart on the left shows that Price-to-Earnings (P/E) Valuation of the Emerging Markets (EM) Index in 2015 is lower than it had been during the previous 10 year period, while the P/E of the U.S. and International Developed Indices are higher than in the previous 10 year period. On the right, you can see that this is also true for Price-to-Book (P/B) Valuation.
In summary, this shift in our moderately conservative portfolio includes:
- Decrease equities exposure from 60% to 52%
- Decrease exposure to U.S. equities from 32% to 26%
- Decrease exposure to International Developed Equities from 20% to 14%
- Adding Emerging Markets as a new asset class 9%
- Capitalizing on the opportunities within the Emerging Market Debt class (increase from 5% to 13%)
Reby Advisors is a conservative wealth management firm, and we only change critical strategies like asset allocation when these changes are supported by ample research and historical precedent, as is the case here. As always and with everything we do, our end goal is securing and protecting our clients’ financial freedom so that you can enjoy your lifestyle with as little financial worry as possible.
*Expected returns and overall risk are calculated using historic performance, standard deviation, and the Sharpe Ratio. The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. It is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio.