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Is there Balance in your Force?
Sunday 25, March 2018

Is there Balance in your Force?

YaniqueF_1

A lot of us don’t achieve the balance required in our lives and this can have multiple unintended consequences.  If you are a Star Wars fan, then you would have heard Supreme Leader Snoke in the film “The Last Jedi” say, “Darkness rises, and light to meet it. I warned my young apprentice that as he grew stronger, his equal in the light would rise.”  What does this mean?  Even in a fictional show, the idea is touted that there is balance in the universe.   But what about your portfolio?  Is there balance there?

One of the easiest ways for your portfolio to go out of balance is chasing last year’s success.  You know exactly what I mean.  You hear people in the media and your friends discussing how well the stock market in either the U.S. or Jamaica did last year, and you are attacked by FOMO (the fear of missing out).  As a person of action, your first step is to take steps to resolve this matter, and what do you do?  You decide to go full steam ahead in the stock market.  However, did you find out why the market outperformed?  Do you know if the conditions are still favourable for the market to have a good year? Are you even considering any other asset class?

Unfortunately, without the proverbial crystal ball, it is very difficult to tell which asset class will be the top performer from year to year.   In the past, if we thought making predictions was difficult, we all now know that that is nothing compared to trying to assess the future with the current U.S. President at the helm.  It’s as if everything we thought we knew has been tossed out the window.  At one point this year, it appeared that growth would be too aggressive in the U.S. economy and we were very worried about the path that bonds would take.  However, in the blink of an eye, we saw U.S. Treasury yields fall and halt their aggressive climb.  This, of course, followed on the heels of the threatened tariffs and the possible trade war it would ignite. 

My bottom line is simple; chasing last year’s success is a rotten investment strategy which is likely to set you up for failure.  Oftentimes, the asset class that performed very poorly in the prior year is the surprise performer in the year after.  Am I saying that you would be successful if you simply looked for the worst performers and invested in those?  No, not necessarily.  Unfortunately, investments really don’t follow a straight line, and as I have already said, it really is difficult to make accurate predictions.  

There is one thing that you can do though; you can partially insulate your portfolio from extreme behaviors in the various asset classes by maintaining proper, balanced weights in your portfolio.  Use your bonds to balance out your stocks for example, and if you can afford it, add some real estate.   I say this  with the knowledge that most of us are very stuck in our ways, we are either a bond person or a stock person, this is something I have seen time and time again -investors refuse to change.    They will go down with the ship before they ever invest in a different asset class.  Additionally, be aware that the balance that used to be present, is now there in a much smaller way.  As the world has become smaller, more global, the correlations between different assets are far stronger now than ever before.  So a severe correction in stocks for example may spill over into other assets.  However, that is no reason to abandon the quest for balance in your investments.  May the investment force be with you!!!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

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