Portfolio Allocations Matter

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Portfolio Allocations Matter

If the events of 2022 and 2023 haven’t conveyed that portfolio allocations matter to investors, it’s challenging to imagine what kind of investment landscape would drive that message home. It’s incredible to think that we’re already entering the fourth quarter of 2023! Before we know it, hurricane season will be behind us, and snow will be on the horizon for our clients in the Northern and Western states. As we approach the cooler months of the year, we can’t help but reflect on the past two years and appreciate the progress we’ve made. In comparison to the turbulent investment climate of 2022, 2023 has provided a welcome break from market volatility.

Take a look at the stark differences in performance of some of the major indices as of Friday, September 22nd as compared to their 2022 returns:1

Index
YTD
2022
S&P 500 (Large Cap)
+13.87
-18.31
NASDAQ (Tech)
+35.23
-32.38
Russell 2000 (Small Cap)
+1.95
-20.46
U.S. Aggregate (US Bonds)
-0.43
-13.01
S&P 500 Growth-only
+18.54
-29.41
S&P 500 Value-only
+8.78
-5.25

We often describe investing as a journey with both high and low moments. The extent of these highs and lows largely hinges on the composition of one’s portfolio and the strategy adopted. Portfolio allocations matter. Unless an investor holds a passive strategy aiming to closely replicate an index, like the ones mentioned earlier, they are likely to experience wildly different results than those published.

During our review meetings, we maintain a consistent practice of evaluating clients’ actual performance against a composite benchmark. This benchmark is a blend of various underlying indices with specific weightings, designed to mirror the composition of real-world portfolios and tailored to each client’s specific requirements. For instance, when examining a 60/40 benchmark, its year-to-date return stands at a positive 5.62%, in contrast to the negative -16.47% loss experienced in 20222. This divergence in results is noteworthy when compared to the major indices mentioned earlier.

This shows that portfolio allocations matter in real-world investment portfolios. The choices made in terms of how to invest (security selection) and where to invest (such as in specific sectors, asset classes, or countries) can significantly influence the nature of one’s investment journey. Fortunately, our clients entrust us to navigate this journey and make crucial decisions about investment design and strategy. The construction of a real-world portfolio takes into account various factors, including investment costs, the economic landscape, client objectives, risk tolerance, risk capacity, time horizon, and personal preferences. Each portfolio can be as unique as the individual it’s tailored for, highlighting the beauty of personalized investing.

Because portfolio allocations matter, tailoring their design necessitates setting realistic expectations. While it may be tempting to invest in an S&P 500 ETF with the aim of replicating its historical annual returns, typically around 10%3, the real challenge lies in sticking to that strategy plus dealing with the human element of investing and our natural tendency to avoid losses and discomfort.

Can one “set it and forget it?”

Looking at the differences of the S&P 500 index above can help paint this picture. Assume an investor buys an S&P 500 ETF (ticker SPY) on Jan 1st, 2022. Also assume that no additional trading nor reinvesting of dividends occurs. As of Friday, September 22nd 2023, this investor is still experiencing a negative return since the initial investment, despite nearly two years having passed. This hypothetical situation can be quite challenging to digest and underscores the importance of managing expectations in the realm of investing, which is just as crucial as the decision to invest in the first place. If you were this hypothetical investor who “set-it,” are you currently “forgetting it?” The answer to that is likely different for each person.

In reality, most investors don’t own just one investment but a myriad of investments they acquired over time as new money was contributed to their accounts. Human behavior is shaped by countless events, ranging from wars and recessions to business and personal triumphs, none or all may occur in any given year. The real challenge for investors lies in sifting through the overwhelming amount of information and noise generated by these events. The key question becomes: What makes up that critical percentage of information that warrants their attention and consideration?

The answer? It depends. It depends on how you’re affected by the events and how likely they are to influence your financial decisions. There’s a common saying that “the best strategy is one you’ll stick with.” Unfortunately, it’s not that easy since portfolio design has many facets to it. We explore those nuances during our onboarding process with new clients by showing them why portfolio allocations matter. We strive to uncover what they want their portfolio to accomplish and then design a specific mix of investments to help them achieve their goals. Each client is different and that’s what we value the most.

As we approach the end of 2023 and the likely challenges and volatility that lie before us, we’d welcome the opportunity to meet with you. We’re fiduciaries first and pride ourselves on being the outsourced financial planners’ and investment advisors’ that families can turn to when life becomes complicated. We take pride in being the kind of company our clients rely on when they want to discuss ideas or seek advice on a wide range of financial matters. We’re enthusiastic about the opportunity to be a valuable partner on your investment journey. You don’t need to invest alone when we’re here to help. Here’s how you can get in touch with us.

1https://www.ftportfolios.com/Commentary/Insights/2023/9/25/week-of-september-25th
260/40 Benchmark is a composite (blended) benchmark comprised of 38% iShares Russell 3000 Index ETF, 5% Vanguard Real Estate ETF, 9% MSCI EAFE Index, 8% iShares MSCI Emerging Markets ETF, and 40% iShares Core US Aggregate Bond Index ETF. Return calculated as of close of trading on 9.22.23.
3https://www.dimensional.com/us-en/insights/let-the-compounding-commence

Are you a Trader or Investor?

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Investor

In a world with constant information overload, sometimes it’s best to take a step back from financial news feeds to focus on core topics that drive home the fundamental components and experiences of being a long-term investor. I don’t need to explain to anyone that it isn’t easy being an investor. However, I believe it’s much harder to be a trader.

Allow me to explain.

A trader tends to rely on short-term, one-off theme-based events to drive their portfolio allocation decisions. They rely on timing the market with the goal of outguessing, and thus outperforming, a benchmark.

An investor tends to view those same events as statistical data and routine (standard) deviations. I, and many others, simply call it noise. An investor typically doesn’t allow this short-term “noise” to drive portfolio allocation decisions. Naturally, I’m making some generalizations since not all traders and investors fall into these categories.

Trading requires constant attention with an ability to guess accurately and consistently over time. Volumes of academic research exist to counter the belief that someone can accomplish this profitably. Trading and market timing strategies must be correct more than just once. An example of this would be selling at the depths of the COVID slump during March of 2020 with the goal of preventing further losses. But when does one buy back in…weeks or months later when things seem better? The 2nd worst performing day of 2020, March 12th, was immediately followed by the 2nd best performing day of 2020 (source). Think about that for a moment…by the time the trades settled the next day, one would have missed the rebound. Missing just a few of the best performing days, days that typically occur shortly after the worst performing ones, can significantly impact portfolio performance and value (source).

Investing is an opposite strategy because it relies on the belief that current market prices reflect all available information and expectations of the future. By that definition, it means that it is impossible to outguess the direction of the markets. Our Investment Philosophy is based on these beliefs. As advisors to our clients, we strive to not let the daily noise of markets impact how we design, implement, and rebalance their portfolio(s). It is the reason why our clients remained invested during March of 2020 and the various market corrections we experienced before then and since (i.e. January 2022).

Because we believe there’s no accurate way to guess which way the markets are going to go, we rely on decades of academic evidence to guide portfolio design. This belief, combined with individual investment and financial goals, time horizon, and appetite for risk, make up the toolkit we use in our daily approach to managing our clients’ investments and the advice we give.

Does this mean we ignore current events? Absolutely not. There are fundamental shifts that occur over time that help guide certain parts of the portfolio. One example of this is how our expectation of future interest rates impact the types of fixed income securities we recommend. During periods when rates are expected to rise (the current view), we strive to stay on the shorter end of the yield curve to lessen the impact of declining bond values while seeking unique areas of the fixed income market with positive correlation to rising rates.

We know last month was challenging for investors. The S&P 500 lost -5.47% of its value during January alone. With that in mind, was it challenging being an investor during 2021 when the same index gained 28.68% (source)? Obviously, no. But as investors, we must take the good with the bad since we rely on our commitments to an investment philosophy to smooth out the short-term noise.

The future is always uncertain. Many potential events are currently shaping the investing landscape. Yesterday’s 7.5% CPI (inflation) reading was a negative surprise, but one that makes sense given the Omicron surge of late December and January. The markets are digesting this number to price in what they believe the reaction from the Federal Reserve will be in March and the remainder of the year. Will the Fed increase rates by 0.25% or 0.50% and how many times this year? Will quantitative easing turn into quantitative tightening? If so, when? Does Russia invade Ukraine? Is there another COVID variant lurking around the corner? These are some of the uncertainties we face right now.

While I don’t know the answers above, I do know that markets are resilient and always forward looking. I know that corporations have an unwavering ability to flex in response to current events with the goal of increasing shareholder value. And I know that the future remains bright, albeit, challenging at times. The one constant lesson that investors know is that conviction matters: “time in the markets is better than timing the markets.” – old adage.

If you’re the type of investor who is seeking a partner to help you through the next few chapters of your life, consider getting in touch with us today. We’d love to learn more about you and how we may be able to team up.

Inflation Surprise, Really?

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Inflation Surprise

It’s been a volatile week. For the better part of six months, investors haven’t seen a material pullback like we are seeing right now. Several newsletters ago (available only to clients), I stated “a strong recover is likely, but we can’t rule out a market correction on any potential negative catalysts.” It seems we now have that catalyst in the form of a spike in inflation.

Let’s put this in perspective so we are all on the same page.

Wednesday’s Consumer Price Index (CPI), the widely accepted measure of inflation, came in at 0.8%, the highest in 13 years and was much higher than the 0.2% predicted. This pushed the year-over-year number to 4.2%, much higher than the 2.6% from March’s reading. But we have to take this in context…what was happening in March/April 2020? You guessed it, lockdowns.

Since then, we’ve seen massive amounts of stimulus, a 25% increase in the M2 money supply, a 2×4 piece of lumber almost double in price, housing values significantly higher, and extra unemployment compensation that’s causing a labor shortage and price increases. Are we really surprised by a spike in inflation?

So if it was kind of expected, why are the markets acting like an angry toddler? In my opinion, markets were overextended from the past several months of rallying. Any negative catalyst that could imply the Fed tightening monetary policy sooner than they’ve stated was enough to cause this pullback. Recall the Fed “not even thinking about thinking about raising rates?” Yeh, they may consider “thinking about it” now if next month’s CPI reading runs even hotter. In my opinion (and history is on my side), raising rates gradually, methodically, and transparently is far better for markets than trying to chase higher inflation with drastic increases to control it. The latter typically causes a recession. Being proactive is the key here and I certainly hope Powell & Co. (slang for The Fed) are smarter than me.

Am I allowing this to change my clients’ investment strategies? A resounding, no. These past few weeks have seen an increase in selling on the growth/tech side of the style box and buying on the value side. This has pushed value stocks higher and my clients have benefitted from this. Even during broad market down days, we see the value side perform less-badly than growth. Why are we positioned this way: Our Investment Philosophy. 

Should we add inflation hedges?

The best long-term inflation hedge is equity exposure, in my opinion. Even during these short-term bouts of volatility, equities are typically the best bet. Other inflation hedges are Treasury Inflation Protected Securities (TIPS) and ultra-short bonds for conservative clients. Real estate exposure and commodities (gold, oil, raw materials, etc.) are hedges as well. But none of these have the long-term track record that equity exposure provides. Since my clients are globally diversified, most of them own all of these already. I can’t make a case for timing our way into and out of concentrated positions specifically to hedge against inflation. Recall that we aren’t traders, we’re investors.

Higher inflation is a drain on purchasing power. So too are higher taxes. Both of which we are likely facing in the coming year. These questions remain:

  1. How “hot” will inflation run before Fed intervention?
  2. How much will taxes actually increase under President Biden’s proposal?
  3. What other catalysts are we likely to face through the fractured reopening of America and the world?

For clients of Coastal Wealth Advisors, I monitor this information, among many others, daily and keep clients informed of issues relevant to their invested dollars, like inflation surprises. We maintain a passive approach to our investment philosophy, but an active approach to monitoring and rebalancing as needed. Monitoring is the final step of the financial planning and investment management process. It is in this phase of the process where I believe value is created. It’s crucial to be in contact with your advisor often. When’s the last time you heard from your advisory team? If your answer is more than a year, let’s chat. I believe there’s a better investment experience waiting for you. Get in touch here.

Is the Stock Market Divorced from Reality?

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By Weston Wellington, Vice President of Dimensional Fund Advisors, LP.

I have been sheltering in place on a former dairy farm in rural New Hampshire—surrounded by more Scotch Highland cattle than people—and relying on my iPhone and Microsoft Surface Pro to keep in touch with the office via email and Zoom video. I haven’t sat in a restaurant in six months, so my dining out costs are close to zero while my grocery bill is sharply higher. I venture out every 10 days or so to stock up on supplies (Hannaford supermarket, Walmart, Tractor Supply, Home Depot) and order frequently online. Judging by the traffic on my dead-end dirt road, I’m not the only one whose habits have changed. It’s only a small exaggeration to say every third vehicle going up or down the hill is a FedEx or UPS truck making another delivery, most likely from Amazon.

For many of us, the daily routine has changed dramatically from a year ago. This writer is no exception. I customarily travel extensively for business, with well over 100 airline flights and dozens of hotel stays over the course of a year. Since March 18, the number is zero on both counts, and the near future offers little reason to expect any change.

With this shifting landscape in mind, it shouldn’t be surprising that some companies have prospered during this upheaval while others—especially travel-related firms—have struggled. From its record high on February 19, 2020 the S&P 500 Index1 fell 33.79% in less than 5 weeks as the news headlines grew more and more disturbing. But the recovery was swift as well: from its low on March 23, the S&P 500 Index jumped 17.57% in just 3 trading sessions, one of the fastest snapbacks ever among 18 severe bear markets since 1896. As of August 18, 2020 the S&P 500 Index had recovered all of its losses and notched a new record high.

Many individuals are puzzled by this turn of events. For those under the age of 75, the news headlines are likely the grimmest in memory: Millions have found themselves suddenly unemployed, and storied firms such as Brooks Brothers, Neiman Marcus, and JC Penney have entered bankruptcy proceedings.

How can stock prices flirt with new highs while the news is so discouraging? One financial columnist recently observed that the stock market “looks increasingly divorced from economic reality.”2

Is it? Let’s dig a little deeper.

The stock market is a mechanism for aggregating opinions from millions of global investors and reflecting them in prices they are willing to accept when buying or selling fractional ownership of a company. Share prices represent a claim on earnings and dividends off into perpetuity—current prices incorporate not only an assessment of recent events but also those in the distant future. In some sense, the stock market has always been “divorced from reality” since its job is not to report today’s temperature but what investors think it will be next year and the year after that and the year after that and so on.

Moreover, the universe of stocks does not march in lockstep. At any point in time, some firms are prospering while others are floundering. This year’s wrenching economic turmoil has inflicted great hardship on some firms while opening up new opportunities for others. Based on this admittedly abbreviated list, it appears the stock market is doing just what we would expect—reflecting new information in stock prices.

Past performance is not a guarantee of future results.

No one could have predicted the tumult we have seen this year in financial markets. But investors would do well to focus on what hasn’t changed.

1. Markets are forward-looking, so focusing on today’s economic data is akin to looking at the rearview mirror rather than the road ahead.

2. Broad diversification makes it more likely that investors capture market returns that are there for the taking—including companies that do far better than expected.

3. Since news is unpredictable, a strategy designed to weather both expected and unexpected events will likely prove less stressful and easier to stick with.

Bottom line: read the newspaper to be an informed citizen, not for advice on how to navigate the financial markets.

1S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
2Matt Phillips, “Repeat After Me: The Markets Are Not the Economy,” New York Times, May 10, 2020.

Reliance on an Investment Philosophy

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Investment Philosophy

 

“The important thing about an Investment Philosophy is that you have one you can stick with.”

– David Booth, Founder and Executive Chairman of Dimensional Fund Advisors

Last week markets continued their slide as investors fled equities for safer-haven assets like U.S. Treasury Bonds. The buying pressure of US Treasuries caused the interest rates on these bonds to decrease. It’s important to remember that bond prices and bond rates (also called yields) move inversely to each other; as more investors push up the price of bonds, yields will decrease. The opposite happens when investors sell out of bonds and buy equities. In spite of all of this, we believe a reliance on an investment philosophy is crucial.

What’s driving the direction of both bond and stock markets?

Two words: Tariffs, FED.

That’s been the name of the game over the last 18+ months, and at times, I feel like we are repeating the same ole song and dance.

A few months ago, the difference between the 3-month and 10-year Treasury bond yield went negative for the first time since 2007. The financial media took this as a sign of imminent recession; however, we maintained the stance that no recession was in sight. On Wednesday, August 14th, the difference between the 2-year and 10-year Treasury bond joined the 3mo/10yr in turning negative. Economists call this negative difference an inversion of the yield curve. An inverted yield curve has preceded each of the previous 7 recessions. As of my writing this, global stock markets are not taking this news lightly – mid-day Wednesday August 14th, the major US indices are down around -2.75%. However, bond markets are signaling conflicting information.

There are a few components that we are continuing to monitor that may explain this inversion and why it doesn’t necessarily spell doom.

European Economic Weakness

Germany posted its first negative GDP results (-0.1%). Recall that a technical recession is two consecutive quarters of negative GDP. This would fit the narrative of a global economic slow-down. In addition, there’s rumors of trouble with a hard-Brexit plan from the EU. Add these issues to Italian Populist Party concerns and one has the makings of trouble abroad. But the US economy, by most measures, is still relatively healthy. Last Quarter’s GDP decreased to +2.1% from 1st Quarter results of +3.1%; well within the range of GDP reports over the last 9 years.

Market Expectations of Further FED Rate Decreases

Three weeks ago, the FED reduced the Federal Funds Rate after a multi-year period of raising rates. The last increase was December ’18. At that time, I believed (and still do) that the economy did not need that final rate hike. Markets felt the same sentiment that caused the rest of December’s rapid market decline. It wasn’t until the FED signaled a cautionary policy in moving rates going forward (i.e. data dependency) that stock markets rebounded to 2019 highs between January and July. And if by political pressure, the FED essentially removed the December rate hike through its rate decrease last month. The FED called it a “mid-cycle adjustment” however, investors wanted more and still do. The question remains if the recent market turmoil and additional tariff action by the Trump Administration will force the FED to reconsider their stance. We almost have to question if one is driving the other? As of today, the bond markets are pricing in a 100% chance of another 0.25% rate cut in September. This pricing in may be the sole reason for the yield curve inversion. Remember that we believe (1st Pillar of our Investment Philosophy) all available information and expectations of the future are reflected in market prices. If investors are expecting the FED to reduce rates, it only makes sense that current rates would also decrease. Yield Curves have historically inverted due to tight monetary policy – that isn’t the case today. And why is no one talking about the $1.4 TRILLIONS of dollars in excess reserves still flooding the system? US monetary policy is not tight by our measures and some would say it’s simply, less-loose.

Why First Trust Portfolios says “This Is Not 2008”

Tariffs

The Trump Administration recently removed some tariffs and delayed others until Dec 1st. The mixed signals from President Trump explains much of the volatility in recent trading days. To say it has been whipsawed action would be an understatement. Markets were moving higher on signs of progress in trade talks with China but dropped significantly as a result of the inverted yield curve. As I’ve been meeting with clients over the last couple of weeks, I’ve explained the rationale behind why the world needs a successful trade agreement with China. To recap, I believe the global economy will benefit when trade secrets and other intellectual property are protected across country borders. These secrets are crucial to keeping capitalism and free markets alive. There remains an additional benefit to tariffs that hasn’t been discussed much – supply chain transitions to non-tariff countries. US companies with locations in China may be forced to transition their business to neighboring countries where labor costs remain low compared to the US but still comparable to China. If US corporations can strategically exit China to avoid tariffs, the Chinese economy may feel more pain than they are experiencing through a loss of jobs and tax revenue. This could be another pain point for the Chinese needed to force the US and China to meet in the middle on an agreement. The only concern I have here is whether the Trump Administration is ready to give a little ground to gain a lot of ground. If we look to President Trump’s twitter feed, I’m not certain he’s willing to capitulate on any demand. This, in my opinion, would be a mistake; negotiations become successful when two opponents meet in the middle.

Conclusion

We, as advisors, monitor these data points and concerns daily and we must remain focused, diligent, purposeful and unemotional in our approach to wealth management. Looking to the Investment Philosophy and the empirical evidence that is deeply rooted in academic science, each client’s portfolio strategy is designed with their financial goals, risk tolerance, and risk capacity in mind. For this reason, every portfolio is built with economic downturns, stock and bond market corrections in mind. It’s the primary reason we use fixed income assets to soften volatility. Recessions are a part of the economic cycle and avoiding them is not possible. It is highly provocative to imagine a strategy that gets out at the top of the markets and in at the bottom at precisely the right times. Imagine the money one could make and the emotional stress one could avoid with such a strategy? The reality is that such a strategy is impossible for humans to implement consistently and reliably and there is a plethora of data to support this impossibility.

Here’s what we will be/are doing for our clients. We believe that maintaining a consistent allocation to a globally diversified portfolio within your risk tolerance remains the most reliable method to achieving your long-term financial goals. To maintain this consistency, we rely on rebalancing techniques to keep allocations in-check as global markets move. This means that, at times, we’ll sell out of portions of one position and buy into others. We may also replace positions or add positions as necessary to take advantage of depressed prices and/or other opportunities. These actions aren’t meant to time the market, per se, but rather to ensure prudent management of our client’s investment portfolios.

Whether you’ve been a do-it-yourselfer or have been working with another financial advisor, maybe it’s time you consider a second opinion? Our phone lines are open, email inboxes properly filed and ready for your message. We’d love nothing more than the opportunity to sit down and show you why we’re different and how we believe our Investment Philosophy can help create calm during market storms.

Here’s how you can get in touch with us today. 

 

COPYRIGHT © 2025 · COASTAL WEALTH ADVISORS. COASTAL WEALTH ADVISORS, LLC IS A REGISTERED INVESTMENT ADVISOR IN THE STATES OF SOUTH CAROLINA, PENNSYLVANIA, NEW JERSEY, NEW YORK, FLORIDA, AND NOTICE-FILED IN TEXAS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE SPECIFIC ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. INVESTING INVOLVES RISKS SUCH AS FLUCTUATING VALUE AND POTENTIAL LOSS OF PRINCIPAL VALUE. THERE IS NO GUARANTEE THAT ANY INVESTMENT STRATEGY WILL BE SUCCESSFUL. DIVERSIFICATION NEITHER ASSURES A PROFIT NOR GUARANTEES AGAINST A LOSS IN A DECLINING MARKET. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. NOTHING LISTED ON THIS WEBSITE SHOULD BE CONSTRUED AS SPECIFIC INVESTMENT ADVICE; WE WELCOME YOU TO CONTACT US OR YOUR ADVISORS TO TAILOR ADVISE TO YOUR SPECIFIC FINANCIAL SITUATION. ADV & PRIVACY POLICY.