Summer is already over?
And so, it begins. The wails of despair that summer is over have already been heard in the halls of our offices and within our network of clients, friends and family. I believe this is a reflection on the Tik-Tok induced pace we live our lives and perceive the world around us. We spend our time thinking about what’s next rather than enjoying the current thing. I could write a few paragraphs on why summer is not over, why August and September are two of my favorite twelve months, but instead I will keep this note in the context of our financial markets.
The daily fluctuation in our financial markets is the sum of all our individual decisions and has a similar tendency to react to what’s next. Almost two-thirds of daily trading activity, all those individual decisions, are programmed into algorithms that execute almost instantly. There are additional algorithms that do not execute instantly, but rather wait for a certain set of parameters to be met before executing immediately.
Those parameters could be based on anything (I list 5 of the million options below):
- Economic data
- Trading volatility within a specific index or security (downside protection or upside participation)
- The calendar
- Keywords in headlines around the world
- Arbitrage between related currencies, commodities, securities, or indices
It sounds exhausting, but it is less so if you focus on a slightly bigger picture. With that in mind, this is the time of year when every financial firm releases their mid-year update and reminds readers that their past predictions were perfect and makes a future prediction so vague that the reader is not sure what to do. Let me summarize for you the guidance for the remainder of 2024 from most Mid-Year Update documents:
Our conclusion is to maintain an overweight position in stocks but prepare for a more defensive stance, potentially in the third quarter, guided by our models.
-Generic Mid-Year Update
Why pick a side of the fence when you can just stand on it? Comments like the above make me quote Sun Tzu, and if I am quoting Sun Tzu, you know something is not achieving its potential. “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”
The Private Wealth Approach? Tear down that arbitrary fence and build a new one. If you are a client of Private Wealth, you have worked with your team to develop an Investment Policy Statement (IPS) that establishes the boundaries for your family; the IPS fence is a combination of the following:
- The mathematical “real” rate of return (after-taxes, after fees) needed to achieve your goals
- Your ability and desire to take risk (the mathematical answer above is not the only input)
- Your need for cash flow
- Your specific tax situation
- Your family dynamics
What are we doing inside the fence for our clients? Big picture notes below (your team would love to talk to you and your friends about specific ideas!):
Stocks: Our investment committee continues to favor stocks over bonds, but less so than we did at the end of last year. Current position is Neutral (+/- 5% of IPS target)
down from Overweight in 2023.
Bonds: the move higher in interest rates over the last 24 months makes bonds a more significant component in client portfolios; cash and short-term instruments are very
competitive. Current position is Neutral (+/- 5% of target) up from underweight in 2023.
Satellite Strategies (as appropriate based on the investment policy statement):
- Private Capital: Overweight. There are many opportunities if a client is comfortable with the nuances of this asset class.
- Public real estate: Overweight (up from Underweight) within a broader income strategy
- Income: Overweight income-producing asset classes within the tax preferences for each client. Energy, Infrastructure, Inflation-Protected, FDIC-insured, Real assets are all options for a tactical overweight.
- Pre-IPO equity: Neutral in terms of allocation; the IPO market appears to be coming to life which makes this asset class more interesting.
- Artificial Intelligence: the committee is reviewing different options for tactically investing in all different parts of this emerging technology from hardware to software, to energy consumption, and consumer transactions.
- Cryptocurrency: the investment committee continues to monitor SEC guidance for fiduciary advisors; the asset class continues to evolve and look favorable for clients wanting to overweight growth.
Download: Private Wealth Asset Management Considerations Q2 2024
Please, enjoy summer through its entirety!
