Tactical Asset Allocation in 2018’s Volatile Market

2 years ago

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2018 has been a remarkably difficult year for market investors worldwide. No major asset class has gained more than 5% year to date, and most are significantly in the negative. I read an article last week by Ned Davis Research, which examined this in detail. The result is that we are experiencing the worst year since Nixon’s presidency for investments across the board. Stocks worldwide are down double digits (with U.S. stocks being the one bright spot, and even they are now down), investment grade corporate bonds are down, long U.S. treasuries are down, commodities are down, real estate is flat, even gold is down. We have seen steeper losses for stocks in the past, but we haven’t seen this kind of overall dismal investment environment in 43 years. Absolutely nothing has worked for investors this year!

At Cabana, we build portfolios that consist of all major asset classes in order to give investors the opportunity to efficiently invest and thus participate in the products of human invention worldwide. By investing in all assets within one portfolio we also can provide our investors with incredible diversity, with the goal of minimizing volatility and containing losses. We believe in this methodology so much that all of our portfolios have a “target drawdown” number identified at the forefront. The portfolio’s number, whether it is 5, 7, 10, 13 or 16, can be easily understood and translated to the amount of drawdown (the maximum amount an investment can be expected to fall from peak to trough during a specific period), in percentage terms. How easy is that? Simply pick the number you are comfortable with and invest accordingly. We believe that if you limit your losses during bad times and stay invested, it is easier to make money when investing conditions improve over time.

Given the information provided above, I thought it timely to revisit our process of tactical reallocation of assets and why it is relevant in even the most difficult of times. First, it is important to understand that investing is a zero-sum game. By that I mean that all money has to go somewhere. If a stock or bond is sold, the investment has only changed its character from a stock or bond investment to a cash investment. If that cash is then used to buy corn, oil or real estate it has once again changed in character, but the underlying capital has not. Of course, I am over simplifying things a bit as supply and demand impact the price of each investment, but the underlying premise is sound. With this in mind, we recognize that the relative attractiveness of each investment option is dependent upon the investor’s perception of the investment opportunity. All investors want to make a return from the deployment of their capital. There is one more caveat to consider. Investors want the return so long as there is not more risk than they are willing to stomach! Even the best possibility of return may not be worth it if it also comes with the prospect of losing everything. We believe that risk and reward as it relates to investment in various assets is inherently tied to the worldwide economic cycle. Much like the four seasons, the economic cycle repeats itself over and over again and can be measured. At certain points within the cycle some assets are perceived to be more valuable than others. Those assets, which are perceived as more valuable by investors at a particular time solve for both return and risk. Return is obtained by virtue of demand for the asset by other investors and risk is minimized by the corollary. Demand for an asset necessarily reduces the risk of owning the asset. At Cabana, our algorithm is actively monitoring general conditions within the economic cycle and identifying those assets that are relatively attractive at any given time. When times and conditions change, we reallocate our capital to those assets which correspond favorably to the new environment. Finally, within each portfolio we build in other asset classes that are inversely or non-correlated with the favored asset classes. We build in other assets that zig when our favored asset classes zag. Through this, we seek to reduce volatility and limit losses when things get bad. The process I just described is what results in our Target Drawdown Series of Portfolios and is how we aim to stay invested throughout good and bad times.

How does this work in tough times? Let’s take 2018 as an example, when investors have taken their capital out of all major asset classes and left it in the cash bucket. For reference, as of Friday, December 7, the U.S. Dollar was up 8.1% this year. While market conditions in 2018 have not allowed us to reallocate into rising assets, tactical allocation has allowed us to limit losses as some asset classes fell out of bed. Even in times like these, all investment performance is relative. I am proud to say that relative to other investments our portfolios have held up well this year. From October 1, 2018 to market close on December 7, 2018 we saw the following:

  • S&P: -10.1%
  • QQQ (Nasdaq 100): -13.5%
  • ACWI: -9.9%

VS.

  • Cabana Core Tactical Income 5: -3.3%
  • Cabana Core Tactical 7: -2.4%
  • Cabana Core Tactical 10: -5.2%
  • Cabana Core Tactical 13: -7.0%
  • Cabana Core Tactical 16: -8.5%
  • Cabana Core Tactical 20: -6.9%

The above Cabana returns are presented net of advisory fees.

All of our portfolios have outperformed during a time when we have been invested primarily in stocks. The reason for this can be attributed to our reallocating to more defensive types of stocks in early October as conditions deteriorated. All the while, we have remained fully invested, collecting dividends and prepared to participate in gains if the market recovers. Alternatively, If the economic conditions continue to suffer, we will likely reallocate to those assets that perform relatively well in a weak economy. We don’t catch tops or bottoms of markets and we are not traders. Our primary goal is always keep our client out of trouble whenever possible and to stay invested for the long run.

-G. Chadd Mason, Cabana CEO

Disclaimers:
 

All written content on http://cabanaportfolio.com website (the “Website”) is for informational purposes only. The material presented is believed to be from reliable sources and no representations are made by CABANA, LLC (d/b/a “Cabana Asset Management”), Cabana Law Group, or Cabana Financial, LLC (collectively, “Cabana”) or its affiliates as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with a financial advisor, accountant or legal counsel prior to implementation. No party, including but not limited to, Cabana and its affiliates, assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

The views and opinions expressed are those of the authors do not necessarily reflect the official policy or position of Cabana or its affiliates. Any content provided by our bloggers or authors are of their opinion, and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a financial advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.

Viewers or recipients of the information herein that do not agree with the term and conditions of use, should not utilize this website or any information contained herein. Decisions based on information contained herein are the sole responsibility of the person viewing the website. In exchange for utilizing the information on this website, the visitor agrees to indemnify and hold Cabana, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to attorneys’ fees) arising from the use of this website, violation of these terms or from any decisions that the viewer makes based on such information.

Cabana LLC, dba Cabana Asset Management (“Cabana”), is registered as an investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

All performance returns are presented net-of-fees and include the reinvestment of dividends and capital gains. Benchmark comparisons are presented gross-of-fees.

Past performance may not be indicative of future returns. No current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels.

All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client.

Historical performance results for investment indexes and/or categories typically do not show the impact of transaction and/or custodial charges or the deduction of an advisory fee, which may decrease historical performance results. There can be no assurances that a strategy will match or exceed its benchmark.

Cabana, LLC manages assets on multiple custodial platforms. Performance results may vary based upon differences in associated costs and asset availability within the Cabana Portfolios.

Disclaimers

Cabana LLC (dba “Cabana Asset Management” and “Cabana Retirement Solutions”), is an SEC registered investment adviser with offices in Arkansas, Texas and Colorado. Cabana only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at https://www.adviserinfo.sec.gov/.

By using this website the user agrees as follows:

All written content on www.thecabanagroup.com website (the "Website") is for informational purposes only. The material presented is believed to be from reliable sources and no representations are made by Cabana, LLC, Cabana Law Group, or Cabana Financial, LLC (collectively, “Cabana”) or its affiliates as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with a financial advisor, accountant or legal counsel prior to implementation. No party, including but not limited to, Cabana and its affiliates, assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

The views and opinions expressed are those of the authors do not necessarily reflect the official policy or position of Cabana or its affiliates. Any content provided by our bloggers or authors are of their opinion, and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a financial advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation.

Viewers or recipients of the information herein that do not agree with the term and conditions of use, should not utilize this website or any information contained herein. Decisions based on information contained herein are the sole responsibility of the person viewing the website. In exchange for utilizing the information on this website, the visitor agrees to indemnify and hold Cabana, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to attorneys' fees) arising from the use of this website, violation of these terms or from any decisions that the viewer makes based on such information.

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