I’d like to start by apologizing for our lack of commentary last week – especially considering the current market environment. Our team hosted our regular advisor webinar on Monday and traveled to a conference in Las Vegas in the later part of the week with several of our advisor partners to discuss the market and the upcoming year. It is our hope that all advisors and clients who work with Cabana are provided with the education that they need each week and that they know they can always reach out with questions or comments.  

Today I believe is a good time to take a step back and talk a little bit about how we view investing at Cabana and, by extension, how we manage our portfolios. I’m going to do that by highlighting a few things that we have always believed in – risk management, transparency and accountability.  

Risk management:  

Risk management starts with having a plan.  

The first part of that plan involves choosing investments that are considered relatively safe. We invest our clients’ assets primarily in large asset-class exchange traded funds. As a result, we seek to capture exposure to entire asset classes (or sectors of those asset classes) in an efficient and diversified manner. Each underlying exchange traded fund (ETF) within our portfolios typically represents hundreds (or even thousands) of companies that make up a segment of the total equity market. Similarly, when we seek exposure to the companies that comprise the S&P 500 or Nasdaq indices, we buy an ETF that includes all of the stocks in the respective indices. When we invest in bonds or treasuries, we invest in ETFs that are made up of the debt issued by many different and highly rated companies, as well as the debt issued by the United States government. We also recognize gold as a unique store of value and as a commodity. When we deploy capital into gold, we use an ETF that is backed by physical gold, not gold futures or derivatives. We even invest in the U.S. dollar via an ETF that reflects the value of our currency relative to others.

The point in all this is to understand that at Cabana, we seek to provide an investment portfolio comprised of the most robust holdings available. By doing so we may give up the opportunity for explosive gains when a few individual stocks are chosen, but our goal is to not have to worry about those one or two or three stocks (or bonds) going broke. For reference, take a look at Netflix (NFLX), Facebook (META), and Google (GOOGL). These have been considered by many investors as some of the best stocks around but have each lost significant value as the business cycle has begun what appears to be a secular transition. Many other individual stocks have lost 50, 70 or 80% of their value since the year began. Some of those companies may go bankrupt, and their stock price may go to zero. At Cabana, our process makes every effort to minimize our clients’ exposure to this possibility. We invest in the economy as a whole, whether it be stocks, bonds, U.S. treasuries, real estate, commodities or the U.S. dollar. The valuation (price) of these fundamental parts of the world economy may change, but the parts themselves don’t go broke! As an investor this is a very important thing to have on your side when things get tough – like right now.  

The second part of our plan is recognizing that the valuation of assets does change, and it changes in response to fundamental economic conditions, amongst other things. The price of even the best quality assets can move up or down relative to other assets when the engine that drives the economy shifts gears. If we can minimize negative price volatility by recognizing underlying changes within the economy, that is a good thing and helps us succeed as investors over the long term. Our algorithm (“CARA”) seeks to do just this. CARA looks back at close to 20 years of data, consisting of bull and bear markets (and everything in between) and builds an allocation of investments across all the various segments of the repeating business cycle, in an attempt to minimize the volatility that naturally occurs. We call this volatility “drawdown”. 

Transparency:  

Next, I would like to take a minute to talk about transparency and why I believe it is so important in this business.  

CARA builds each of our model portfolios with an intended “target drawdown” at the forefront. We do this for several reasons, a couple of which we believe make us unique as investment advisers. The first reason is that we believe all investors are different when it comes to the risk that they want to be exposed to during the investment process. All investing involves risk, so it makes since to construct portfolios that have different risk characteristics. This idea is not unique to Cabana and most, if not all, advisers construct portfolios using labels such as “conservative”, “moderate”, “growth” or “aggressive”, in order to provide a solution for each type of investor. What is unique about our portfolios is that each portfolio we build is based upon an intended target drawdown number (a numerical percentage). Additionally, we publish that target drawdown number and put it on the front of each portfolio. To me, that is a big deal and one of the things I am most proud of about Cabana. While not a guarantee, it does give an investor a clear and understandable idea of the intended volatility or “drawdown” we are “targeting” throughout the inevitable good and bad times of the repeating business cycle. We put our intent right there for our clients to see. We don’t hide behind vague or ambiguous terms. When we hold at or around drawdown during difficult markets, our clients are pleased that targets have been maintained. When we violate our targets during difficult markets, we are held accountable. I think accountability is important. We are fiduciaries and I believe fiduciaries should be held accountable. It makes us better advisers over time, and it ultimately gives our downstream investors confidence that we are always fighting to get the best result for them. Right now, we are outside of our target drawdown parameters, and we are certainly accountable.  

Accountability:  

So, what does that mean to be accountable? It means that we acknowledge the issue and work to incorporate new information and data into our system so that moving forward we have an even more robust process. Like everything in life, investors become stronger as a result of learning from the tough times, much more so than the good times. We believe it is the great financial crisis of 2008-2009, the Covid-19 pandemic of 2020-2021 and the historic jump in interest rates going on right now that makes us better. Those (and other) unique and perhaps unforeseen events have now been experienced and are factored into our allocation of assets going forward. CARA incorporates this machine learning process into her optimization each time we reallocate. We have reallocated twice this year and are prepared to do so again. I believe it is the incremental “living and learning” CARA does that makes her so powerful as time goes on. I like to say that If I can live another 30 years, CARA is going to be one very smart lady. I can’t wait to see her then. Of course, there will always be something that has never been seen before and she will never be perfect, but she doesn’t have to be. She just has to be good (and transparent) enough to get people invested, allocate to relatively “safe” and diversified assets that are deemed attractive at a given point in the economic cycle, avoid large losses whenever possible, and keep people invested over a reasonable time horizon.  

For now, we will have to wait and see where this market takes us. There are many unknowns, and we will avoid predictions. We will follow our rules-based process and know that we are allocated to an underlying basket of quality assets. We will acknowledge changes in the business cycle (as recognized by CARA) and respond objectively. We will remain accountable and welcome new and unique difficulties, which serve to make us stronger. Most importantly, we will remain secure in the knowledge that we are investors and fighting the good fight to change lives for the better. 

We have put together a video to go along with today’s commentary explaining many of the points above to help our clients, as well as our advisor partners and their clients, understand this current market and how it impacts Cabana’s portfolios. That link is embedded below. Please don’t hesitate to reach out to us if you have any questions.  

Key terms:  

• CARA stands for Cabana’s Cyclical Asset Reallocation Algorithm.  
• Drawdown is defined as the maximum loss, or amount an investment can be expected to fall, from peak to trough during adverse market conditions. Monthly returns are used to calculate the drawdown percentage. This method of measurement creates a new “high-water mark” each time the portfolio’s value increases, which means drawdown is determined from a portfolio’s highest value, not from an investor’s starting balance. 
• A high-water mark is the highest peak in value that an investment fund or account has reached (Investopedia.com). Cabana calculates this high-water mark based on end-of-month data.