By now, you should have received your year end statement from your advisor or broker and perhaps you have reviewed it and had a conversation. In the first two weeks of this new year (2023) I have had several conversations with other financial advisors and have read a lot of commentary by various “experts” in our field. So far, nearly all of the advisors have told me that they simply stayed with a buy-hold-rebalance style (commonly referred to as asset allocation) investment strategy throughout 2022. That’s didn’t work out too well for their clients because stocks were down more than 18% and U.S. bonds dropped by more than 13%; the typical balanced portfolio of 40% bonds and 60% stocks was down about 16% for 2022.

At D. Scott Neal, Inc. we saw structural changes taking shape in 2021 and materializing in the first half of 2022. Geopolitical power shifts, unprecedented debt levels, shifting population demographics, new technologies, decades of loose monetary policy, and high inflation have permanently altered the investment world. As a result of these seismic economic changes, we made significant updates to our portfolio allocations, risk controls, and modeling in the first half of 2022.  For those clients who went along with our strategy (or gave us complete discretion to do so) we had the new, more active, strategy implemented by June. 

As you may recall from our previous writing about this, we blended our two long term strategies (wealth preservation and momentum growth) into one and varied the amount of each according to a client’s specific risk profile.  Risk profiling is a combination of risk tolerance and risk capacity.

We added several individual stocks along with some inverse ETFs (those that go up anytime the market index falls) to our portfolios. In our attempt to address ways to moderate the riskiness that we saw, we also paid close attention to the size of each investment (i.e. that portion of the total portfolio invested in any one individual investment) and how the size could impact risk and return. Picking a specific number of shares to add to the portfolio has an impact on total return as well as risk.

Since making these changes, the D. Scott Neal, Inc. model portfolio has enjoyed a much smoother ride than a traditionally allocated portfolio or the markets themselves.

Outlook

 We anticipate a recession in 2023 and we are well positioned to take advantage of it should that happen.  (We hope that we are wrong about that.)  However, if that comes about, it will put a lot of stress on those investment managers who are holding tightly to the notion that simply buying the dips (or buying and periodically rebalancing) is enough to ensure that their clients’ portfolio will be okay. Instead, we prefer a more adaptable approach that will minimize risk over the largest set of possible circumstances.  For those clients who let us, we have positioned their portfolio accordingly.  While we model what we think will be best, we are keeping our eye on the data and can make changes as the world unfolds in unanticipated ways.

We look forward to having conversation with you about your goals and how our work together can improve your chances of achieving them. In our next post we will be looking forward to next steps along this journey. Hope you will join me then.