Since I miss football season so much, I had to throw this one in for a little fun. When I was in college, I had a notebook that I used specifically for nerdy exercises like this. One was a baseball lineup of the buildings on Ohio State’s campus. Don’t try too hard to make sense of that. One was a list of my friends and which characters we would be on the show 24. Stick with me here because there is a purpose, and yes, a quick jab at the Browns if you make it all the way to the end.
Let’s imagine we are going to build a portfolio of NFL teams. Here are a few of our choices, and how they compare to the asset classes in your portfolio:
Eagles – The Eagles are my pick for foreign stocks. The 2017 champs, we believe they have just begun their stretch of competitiveness as they have a solid core and a history of streaky success. They might not be as flashy as some of the others, but this is where most of the smart money seems to be going. 1
Patriots – This is painful for me to admit, but only fair. The Pats are our growth stocks, including tech and the FAANGS. They have enjoyed the longest run of success in recent memory with no reason to believe they won’t keep it going in 2018. 2
Steelers – Let’s call my home team the value stocks. They have done ok recently, though on paper it seems like they should be doing even better. They have a whole bunch of titles under their belt and have shown long-term stability relative to their peers.
Bengals – I’ll go with the Bengals as my pick for bonds. They seem like they have been a safe bet to win 8 or more games per year in recent seasons, but they are yet to win a playoff game in that stretch. Let me put it this way: their QB is Andy Dalton. Bonds.
Giants – The G-Men are my choice for alternative investments. They put us to sleep in between their periods of relevance, but when they are a factor, they have a history of winning the whole thing. Believe it or not, they have won four Super Bowls including two in the last 10 years. Yes, we have finally stumbled upon the topic of this piece…
As of the time this was written, most alternative investments are relatively out of favor. They have underperformed just about everything the last 3-4 years. Some of our clients ask why we include these, and if it is worth waiting for them to add value. When I’m referring to alternative investments, these are asset classes like hedge funds, managed futures, and real estate.
The main concept of any asset allocation strategy is to build portfolios made up of assets that don’t all move in the same direction at the same time. If equities underperform, we expect bonds and alternatives to cushion the blow. If bonds or alternatives underperform, hopefully that means equities capitalized on their upside potential. If every asset in the portfolio performs similarly every year, we are not truly diversifying.
The little-known secret of asset allocation is the tendency of traditional asset class correlations to spike in times of crisis. Value, growth, small cap, large cap, even foreign equities all tend to drop at the same time. When protecting against the downside is most critical, diversification among traditional asset classes fails us.
Like most investments, you don’t know when it is the best time to invest in alts until it is too late. For example, when the tech bubble burst in 2001, the managed futures index was UP 38%. That was our portfolio’s equivalent of making a David Tyree-esque catch against its helmet to keep your retirement alive. David ReTyree?? Oh snap. Reactionary investors got in AFTER that and have since lost patience running back to equities after missing most of the recovery. Only those who maintain their long-term discipline realize the value of alternative investments.
Most of the largest and most well-known endowment funds and foundations are all-in on alternatives. Collectively, their allocations to these positions has grown from 20% to 60% over the last 20 years. To be clear, we think a 10% - 15% allocation is the sweet spot for most individual investors. Those institutional managers are playing a different game than the rest of us, as generating a steady return and stabilizing their annual distribution rate is their priority over long-term upside. But that does kind of sound like a retiree, right? Maybe now would be a good time to reference one of my previous blogs regarding sequence of returns risk.
Here’s one more for the road because I just couldn’t help myself…
Browns – The Browns aren’t an asset class in which a professional would invest. The Browns are the emotional DIY investor who jumps to cash at the first sign of a correction, and then misses the ensuing rebound completely. They constantly turn over their coaching staff and QB, and they need to completely re-evaluate their process at all levels. They have done long-term emotional damage to their investors and there has been no sign of improvement.
1 Reflective of capital market assumptions from LFA, BlackRock, JPMorgan. Not a guarantee or specific recommendation.
2 Based on sector research from Fidelity. Not a guarantee or specific recommendation.
Past performance is no guarantee of future results.
All investments involve risk, including possible loss of principal. Investments in small- and medium-capitalization companies may involve a higher degree of risk and volatility than investments in larger, more established companies. Investments in foreign securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations. Fixed income securities are subject to interest rate risk. As interest rates rise, the price of a fixed income security declines and would reduce the value of a fund's share price. The risks of high yield securities include, but are not limited to, price volatility and the possibility of default in the timely payment of interest and principal. Alternative investments are not appropriate for all investors and can be illiquid. Real Estate Investment Trusts invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid. This comparison is provided for entertainment purposes and should not be construed as a recommendation to purchase any security. CRN-2144530-060718