Things are often made more complicated than they need to be. Take basketball as an example.
Modern basketball analytics have created a whole new language within the sport. Outsiders have no clue what it means, and insiders waste time on stuff that doesn’t matter. Boy, does that relate…
You could be the best analytics coach out there, but it doesn’t change the fact that if, on average, your team gets 50 shots a game and the opposing team gets 60, you are going to lose a lot of games. Our game plan, every game, is simply to get more shots than the opponents. Who gets the most shots determines who wins the game more times than not. A collective understanding of that allows more clarity around coaching the details.
Simple beats complex.
Asset Allocation
We aren’t playing basketball, but we are striving to protect and grow wealth. The equivalent game plan in our world to getting more shots than opponents in hoops is getting our asset allocation right.
We reference this image to drive the point home:
The higher-level decision is: What percentage of stocks, bonds, and cash do we hold? To make that decision, we need to factor in investor risk tolerance and risk capacity. In addition, we need to understand the potential for each asset class to protect and grow our wealth.
More stocks, less bonds, risk neutral; you’ll continue to hear us preach that. We just don’t think bonds offer the return potential or risk management that people believe they will.
Deficits, Debt, and One Question
Our federal government consistently spends more than it receives. The chart below shows our outlays (expenditure) vs our revenues. Notice the projections. The budget deficits aren’t going anywhere.
How do we fund persistent deficits? With Debt. More and more bonds. Meaning, we must continually issue bonds to keep the train rolling down the tracks.
Notice in the image below, the projected level of Federal debt that is held by the public. It’s growing and projected to keep growing. Growing debt creates interest expense (a big and getting bigger expenditure for us) increases, which makes deficits larger and means we need more debt to keep going, and…
It would be much easier if we could cut spending, but the bulk of our expenses are in untouchable areas – think Medicare, Medicaid, social security, etc.
For anybody lending money to the US Government (meaning buying government bonds), especially over the long term, do you believe they can pay you back without printing money or deploying some form of yield curve control?
Portfolio Impact
Our belief is that the money will be printed, and/or some form of yield curve control will have to take place. That means the value of the dollar will erode, and that’s an issue for bonds.
That debt is easier to pay off when you inflate away the value of the dollar through printing more of them. For bondholders, we are worried that what they perceive as safe is far from it. Real, after- tax returns are what we are seeking, and we do not advocate bonds as the place to find them.
Our focus is to impact the asset allocation level. We believe getting that right is more crucial than ever before, given the backdrop we are in.
We want your clients and your business to be positioned for the highest compounded returns possible. Owning more equity risk while being less handcuffed to bonds seems to be a simple path towards accomplishing that objective.
We are digging our heels in to use and build more options-based strategies.
As always, thank you for your trust. Please reach out with any questions.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward-looking statements cannot be guaranteed.
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. This should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations. Outcomes can and will vary based on individual financial circumstances.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2602-8.