For 2016, if you stuck with a traditional "buy and hold" strategy, you involuntarily likely took on greater risk than any time in the recent past because correlations between stocks and bonds flipped and when they reversed , bond portfolios (the usual "safe" investment) were crushed, while stock portfolios barely kept up and in doing so made risk-adjusted returns that much more vulnerable.
For the moment, that risk has actually increased because equity valuations (as measured by the 12 month forward Price to Earnings ratio at 17.1) are at the highest level since May 2015).
If equity prices "correct", without a bond market that rises in price in equal measure, the buy and hold balance will not be able to keep the additional volatility out of the portfolio as was the case throughout 2016.
With the most recent rally in stock prices, "greed" (from CNN Money's Fear and Greed Index) is at extreme levels:
Last year, "greed" peaked In late November and January and February were important tactical buying opportunities. This situation could easily repeat itself as we head into 2017. We were able to make some very strategic trades in the first half of 2016 that added significant value to our models in the second half of the year.
Almost 2 years ago we (at High Rock) introduced a tactical model to add broader scope to our investing process and our clients (and the High Rock management, because we invest in the exact same models) have benefited immensely from this, while at the same time reducing their/our exposure to unwanted volatility and lowering their/our risk profiles.
Last Friday we received an email note from a client with a simple "thank you". Nothing makes us feel better than to be appreciated.
Tomorrow we will host our weekly client webinar (the final one for 2016) where we will discuss our thoughts and themes for 2017.
Given the current investing environment and the changing world geo-political issues, more than ever we will have to be ultra careful with how we invest our and our client money and the buy and hold strategies that may have served investors reasonably well in the past, will likely be leaving them potentially even more vulnerable than they were in 2016.
If you would like to receive this blog directly to your inbox...
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist