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Trading at WJ

Posted: Jared Jameson

On a recent conference call, we discussed the general reasons we trade portfolios, trades we have placed during the COVID crisis, and some recent/upcoming trades. In case you missed the call, we recap it in this WJNotes.

Government Mask Mandate

Before we discuss trading, we wanted to mention the actions we are taking to address the recently passed County and City resolutions regarding mask wearing and social distancing. Both the City and County have mandated masks in businesses when six feet of distance cannot be maintained between employees and customers. Both will fine businesses that violate the orders. To meet the mandates, please wear a mask if you come to our office. We will also be wearing masks in meetings. As an alternative, if you have not used Zoom for a meeting, we would encourage you to try it. We have found it effective (and convenient) for conducting meetings.


In general, we prefer to limit trading in accounts because trading in taxable accounts is tax inefficient. We also limit trading to avoid commissions although commissions have become less relevant since Schwab’s move to zero commission ETF trades, free mutual fund trading on Schwab and other OneSource funds, and an $11.95 commission on all other mutual fund trades. To avoid unnecessary trading, as shown in your Investment Policy Statement, we trade for five specific reasons. They are:

  • Rebalancing
  • Tactical Asset Allocation
  • Replacement of Money Managers
  • Tax Trades
  • Cash Contributions or Withdrawals

Every trade in your portfolio can be associated with one of these reasons. We usually send out a WJNotes describing trades associated with the first four reasons. The fifth reason is typically the result of a client request. Please contact us if you ever have a question about a trade.

We have traded multiple times during the crisis primarily to rebalance portfolios. What is rebalancing? Rebalancing is the quintessential example of “buy low, sell high.” The following graphic shows a simple rebalancing example:

The initial portfolio allocation above is 50% stocks and 50% bonds. The initial allocation is typically chosen to match a client’s risk tolerance, goals and objectives, so we try and maintain the allocation over time. Let’s assume stocks fall 40% and bonds do not decline. This is what happened in March. The new portfolio allocation would be 37.5% stock ($30/$30+$50) and the portfolio would be substantially underweight stock. How do we bring the portfolio back into balance? We would sell $10 of bonds and buy $10 of stocks. These trades bring the portfolio back to the target 50% stock and 50% bond allocation. This is rebalancing.

When should you rebalance? The timing of rebalancing is more art than science. Our approach is to avoid “all or nothing” decisions as we consider this market timing. So, we usually partially rebalance on a consistent, time-based schedule. You will note below we used a two-week interval during the Coronavirus sell-off. We continue to rebalance while the allocation remains out of balance.

Let’s now turn to actual trades placed in portfolios over the past three months. Hopefully, providing more detail on the trades will give you additional insight into our investment strategy and approach. The following graph shows the trades:

The lines in the graph show the change in a $100 investment in five asset classes since 1/1/2020. The numbers at the end of the line represent the ending value as of 6/26/2020. The five asset classes in the graph are as follows:

  • Stock – Global Stocks
  • Bonds – A combination of many different types of bonds including municipal, treasury, corporate (credit), and mortgage bonds.
  • Treasuries –A subset of bonds above. Only debt issued by the US Government.
  • Credit – Also a subset of bonds above. Only includes corporate bonds.
  • Managed Futures – A combination of the trend following strategies used by WJ Interests.

We are not discussing diversification in this WJNotes, but you can clearly see the benefits of owning diversifying asset classes like treasuries, managed futures, and bonds. Each held their value or gained while stocks sold off.

The trades and descriptions we placed were as follows:

  • Trade 1 – Sold Treasuries and Managed Futures and bought Stocks. This was a rebalancing trade. We decided to rebalance because the stock allocation had declined significantly from its target. The stock fund we bought, Vanguard World Total Stock (VTWAX), was purchased as a temporary holding. Because markets were moving 10% in a day and trading was difficult, we bought one diversified stock fund instead of multiple focused stock funds.
  • Trade 2 – Sold Bonds and bought Stocks. Same explanation as above. We also bought corporate credit bonds as yields had moved to attractive levels. This is more of a tactical trade as we sold other bonds to fund the purchase.
  • Trade 3 – Sold Bonds and bought credit. Continuation of Trade 2.
  • Trade 4 – Unlike the previous trades, we sold Stock (a portion of VTWAX) and bonds and bought managed futures and ROMO. ROMO, as discussed in a previous WJNotes, is a tactical allocation funds that shifts in and out of asset classes based on momentum.

So how did we do? The simplest way to judge results of the trades is compare the lines after the trades. If the buy lines go up more than the sell lines, the trade was profitable. Using this criteria, Trades 1, 2, and 3 have been profitable while Trade 4 has lost money. Of course, two months is not enough time to judge success or failure. It will take many more months before we can make a final judgment.

Recent/Upcoming Trades

We have placed or will be placing several additional trades. The primary reasons for the trades are as follows:

  1. Sell the diversified stock fund VTWAX and buy multiple focused stock funds.
  2. Sell Oakmark Fund. We have owned this fund for many years and its performance has been comparable to its benchmark, but we want to simplify portfolios by eliminating the only global fund in the portfolio.
  3. Sell AQR Risk Premia. We are selling this fund because its correlation to other funds is higher than we expected. It is also a relatively small position.
  4. Sell FPA New Income. We have previously sold FPA to fund credit purchases and will be selling the small, remaining position in this set of trades.
  5. Buy WABIX. WABIX is the only new fund in the trades although we have owned it in the past. We are buying it as a complement to ROMO. WABIX uses a strict valuation methodology in selecting investments and ignores recent momentum. ROMO, on the other hand, does the opposite and ignores valuation and considers only recent momentum. The funds in combination complement each other.

If you have questions about our trading philosophy or trades in your portfolio, please contact us.

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