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:
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:
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:
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.
We have placed or will be placing several additional trades. The primary reasons for the trades are as follows:
If you have questions about our trading philosophy or trades in your portfolio, please contact us.