Dec 2019: A Different Approach to Low Vol

by | Dec 4, 2019 | Market Updates

Through the first 11 months, 2019 has been very kind to investors. Despite political turbulence around every corner, and some short bouts of trade-related turmoil, the markets have been able to make a series of highs in recent weeks.

Nov19.Returns

As you can see, the three funds in the table above represent non-US stocks, US Stocks, and Bonds. These are plain vanilla asset classes generally seen in a typical diversified portfolio. Returns like those listed above are on the list of things we should be thankful for in 2019!

As you can see, the three funds in the table above represent non-US stocks, US Stocks, and Bonds. These are plain vanilla asset classes generally seen in a typical diversified portfolio. Returns like those listed above are on the list of things we should be thankful for in 2019!

Portfolio Adjustments

We adjusted portfolios in November, as discussed here. It was a larger rebalance mainly designed to increase yield and risk management (yes, we know you’ve heard that before). Here’s the two important takeaways on the current portfolios as a whole and the repositioning we did in November: 

  1. Risk: steep portfolio losses (large drawdowns) can crush a portfolio’s ability to generate sufficient returns…especially in or near retirement. Given the recent performance of nearly everything, we wanted to increase our ability to protect against that.
  2. Return: We wanted to accomplish #1 without impairing potential return. Let’s explore that.

Traditional Risk Management

Stocks are traditionally known as risky, while bonds are known as conservative. It makes sense given the greater potential of stock returns vs bonds (Although we did write about that here showing that bonds have actually produced higher returns than stocks since 2000)

Bonds.Stocks

Under that framework, risk management means owning less stocks and more bonds. Historically, it’s worked well. And in recent years, those bonds have even added “higher returns” to that diversification benefit. But, think about the impact to the portfolio in the past and then think about it in today’s environment…

Increasing risk management today by owning more bonds could reduce potential return below a level that’s acceptable. The double whammy is the fact that bonds now carry potential risk that’s much higher than in the past. We wrote more about the backdrop and elevated risk in bonds in last quarter’s update, you can see it here.

Our Portfolio Risk Management 

Our approach to portfolio construction starts with sound diversification, similar to a traditional approach. What’s different is our approach to volatility, which has nothing to do with the “low volatility” stocks that have become among the most expensive in the market.

LowVol

Instead, we include explicit hedging (a form of insurance), allowing us to own stocks we think have favorable growth and income prospects while providing a cushion if volatility increases. We believe this approach allows us a greater chance to defend against significant losses, and enjoy greater upside participation when markets are friendly.

In short, we own more assets we believe have attractive return potential, while managing risk with more than just diversification. Latest model fact sheets are here: https://impact-series.com/fact-sheets/

As always, we appreciate your trust and invite you to use our scenario analysis to see where hidden risks may be lurking.

Thanks,

Your Team at Aptus

The Impact Series is a model portfolio solution developed by Aptus Capital Advisors, LLC. Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or to advise on the use or suitability of The Impact Series, or any of the underlying securities in isolation. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy.

Investing involves risk. Principal loss is possible. Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value (NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance and may not protect against loss of investment principal. ACA-19-07

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