The false promise of changing course

One of the fundamental guideposts in managing assets in order to try to maximize value is “stay the course.” It sounds basic and easy, but it turns out to be difficult in the day-to-day world when there are so many things that rise to the surface that might be an idea worth pursuing.

So let’s review some of the recent investment darlings and think about them in the context of creating the best opportunity to produce attractive long-term returns at tolerable risk levels.

Energy sector

The energy sector was the worst performing sector in 2020 and drew a lot of attention for that poor performance. The return was -32.84% for 2020.* At that point, with urging from the financial media, many people considered selling this sector from their holdings.

For those that stayed the course, the energy sector has proven to be a great part of their holdings with a year-to-date of 43.40%* (through the end of June), making them the best performing sector in the US market.

This is the challenge of managing using past returns — the sector that was worst in 2020 is literally best in 2021. The challenge is that you don’t know how markets will correct or normalize and most importantly, you don’t know when.

Had you made a giant portfolio change to accommodate this, you would be underperforming this year as the result of not holding it. One of the reasons to stay the course is to create long-term holding time periods in order to realize the full opportunity.

Meme stocks

Meme stocks were the other story in the financial press that captured attention and encouraged some people to disrupt their holdings and trade. The most notable of these were GameStop Corp. and AMC. These stocks had unprecedented volume after postings on a Reddit investing forum went viral.

There are several concerns with these holdings. Basically when you hold individual stocks you bear all the risk without the diversifying benefit of a well-constructed portfolio. You also bear all the trading risk as to which prices are actually executed for your purchase and sale. It leaves your portfolio without a safety net.

GameStop was the first of these meme stocks to capture mainstream media attention. It has been a wild ride to hold GameStop, but it also proved to be a very difficult stock buy or sell at the price that you may have wanted. And those execution prices will drive your personal return in the stock holding.

Further, depending on the type of account that you used to trade GameStop, you might have been subject to margin calls and even had a portion of this holding sold for you at unattractive prices (or at least prices not chosen by you) to meet broker requirements.

GameStop’s price has swung wildly. As of the close of July 7, it was trading at $190.66, which is above where it traded a year ago. But it is well below its peak of $483 posted on January 28. The shares have shown a somewhat steady decline since that time as the company posted quarterly earnings and announced share sales.

AMC, a more recent meme stock, posted a record high of $72.62 early in June as it was recommended on Reddit and Twitter. On July 7 it closed at $45.07, still above where it traded a year ago, but significantly off the peak if you invested in the stock during the height of the frenzy kicked off by social media.

The real danger with these holdings is the large non-diversified risk in your portfolio. And on top of that, your ability to trade at prices close to those driving you to make this decision is highly uncertain.

Considering risk

In all these decisions, the discussion has centered on the changing return opportunities, but risk management is also key to your portfolio composition. Exposure to just one stock or just one sector is much riskier than that of a balanced well-diversified portfolio.

As an example, please note the Periodic Table of Investment Returns below. This table includes core asset classes that are used as building blocks in making your portfolio. (Note that these are asset classes, much more diverse than either an individual stock or sector.) In each year, the asset classes are ordered with returns ranked from highest to lowest. Note that these return values may vary highly from year to year.

Callan PEP DatabaseSource: Callan PEP Database.

You can see in just looking at the table that asset classes change positions — a lot. If you look at one of the riskier asset classes, Emerging Markets Equity (green teal box color), it is often found either at the top or bottom. This shows the higher risk associated with that asset class. Either you are earning a lot or underperforming other asset classes. Exactly when this change happens is difficult, if not impossible, to forecast.

So the question is how to have that earning opportunity while protecting your portfolio. If you look at the dark gray boxes in the middle of the chart you will find a Moderate Benchmark created by our Investment Committee, a hypothetical moderate portfolio of 60% equity and 40% fixed income. You can see that these boxes are usually in the middle third of the portfolio. An investment portfolio that is designed to closely match it thrives to gain exposure to higher returns and protect from lower returns.

This approach to balanced portfolio construction helps protect your portfolio from the bottom rows of the periodic table, where asset classes have underperformed in that year while maintaining the opportunity to participate in their higher returns.

Looking ahead

It’s always difficult to know what will make headlines next. What industry will perform the worst? Which stock will capture the attention of social media forums and become the next meme stock? You can’t know. But you can establish a portfolio that is constructed to provide highly diversified exposure to the asset classes. And that diversification’s goal is to protect your returns for the long-run.

So while it is tempting to get off track and jump on the excitement of a meme stock or selling off an industry, it has been those investors that hold the course that maintain the better performance and appropriate risk in the long run.


* Source: Morningstar Direct.

© [2019] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.

Moderate Benchmark and Bond Benchmarks

The returns for the Moderate Benchmark and Bond Benchmark represent results for broadly diversified index-based asset allocations during the corresponding time period. The Moderate Benchmark is a broadly diversified 60% equity/40% fixed income allocation. The Bond Benchmark is a broadly diversified fixed income allocation. Both benchmarks are comprised of indices deemed appropriate for each sub-asset class within the allocation and are subject to revision at any time. The historical Moderate Benchmark and Bond Benchmark performance results are provided exclusively for comparison purposes. It should not be assumed that any actual or hypothetical account holdings will correspond directly to any such comparative allocations. The performance results for the Moderate Benchmark and Bond Benchmark reflect monthly rebalancing. That is, each month, regardless of performance, the allocation to each investment style is adjusted to reflect the model allocation. The results reflect hypothetical, back-tested results of the Moderate Benchmark and Bond Benchmark that were  achieved by means of the retroactive application of the allocation, and, as such, the corresponding hypothetical results have inherent limitations, including: (1) the results do not reflect the results of actual trading, but were achieved by means of the retroactive application of the Moderate Benchmark and Bond Benchmark allocations, certain aspects of which may have  been designed with the benefit of hindsight; (2) back tested performance may not reflect the impact that any material market or economic factors might have had on the allocation used;  and, (3) for various reasons (including the reasons indicated above), any actual investor may have experienced investment results during the corresponding time periods that were  materially different from those portrayed for either the Moderate Benchmark or Bond Benchmark.

Current Benchmark Components

Moderate Benchmark: 32% BC Aggregate Index, 3.2% JPM EMBI Glbl Diversified Index, 4.8% ICE BofAML High Yield CP BB-B, 18% MSCI EAFE Index, 6% MSCI Emer Mkt Index, 9% Russell 2000, 27% S&P 500 Index. Bond Benchmark: 88% BC Aggregate Index, 4.8% JPM EMBI Glbl Diversified Index, 7.2% ICE BofAML High Yield CP BB-B.

The false promise of changing course

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Janice Deringer


Janice L. Deringer is a member of Wipfli Financial's Investment Committee and a consultant who focuses on serving individual and corporate clients. She brings over 20 years of institutional investment management experience to her strong interest in educating women and individuals regarding financial decisions, realities and possibilities.

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The false promise of changing course

time to read: 6 min