The Push and Pull of Risk Versus Reward

Typically, we construct portfolios based on your risk tolerance and the return we believe is designed to work toward your goals long term. If there was ever a time that we could consider a “normal” period in our lives from an economic standpoint, we build diversified portfolios of stocks, bonds, commodities and then add weight to areas we believe will add return without adding too much risk that we rotate throughout the year.

Last year, managing portfolios was an incredible challenge due to the tariffs imposed and reversed by President Trump, which made projecting into the future corporate profits and the risks of inflation.  During the height of the tariff turmoil, we de-risked portfolios by reducing exposure to stocks and added back risk slowly after he made his reversal in April. Fortunately, we were able to identify asset classes like gold that acted more like a “hedge” against stocks and did not correct when markets did. Assets that act like this are intended to help manage portfolio volatility and potentially make the ride smoother.

While this year has been a different story, the tariffs are no longer the issue - the war with Iran is now the front-page story. Rising gas prices due to the closing of the Strait of Hormuz and the everyday effect on consumers and intermediate or long- term effect on inflation is debated daily. Meanwhile, markets move on the President’s every tweet while the facts rarely play out as promised. Interestingly, bad news has been digested rather well while positive tweets produce strong upward movements in prices. Is the market more focused on the possibility of better-than-expected earnings which deserve higher prices or just making believe that closing the Strait for a long time will only cause minor short term problems that will resolve before causing shortages of jet fuel, much higher gas prices or even interest hikes by the Federal Reserve?

What does this mean to you? We have taken a “better safe than sorry” attitude and once again reduced equity positions, leading to slightly lower returns as the market has re-gained steam. We will continue to monitor the situation in Iran and the Strait and increase risk after we have more clarity. If the situation worsens, we may reduce risk further but at this time we are comfortable waiting and being cautious.

Keep in mind if you have a non-retirement account, we cannot generally reduce risk without the potential for causing you to pay taxes on gains that would result, and therefore we have been less able to reduce risk across the board. Instead, we have selected a few holdings to sell that we felt were not performing as we had expected and eliminated them. 

Summary - While we are happy for our clients despite the turmoil created by the war in Iran, markets have recovered to new highs, and we must consider the possibility that investors are discounting the possibility that prolonged issues with the Strait will have a larger effect on consumers and corporate profits in many sectors. While we try to stay neutral politically, as many of you have expressed your personal political beliefs, it has been more challenging to make investment decisions as markets move based upon tweets and not facts. As always, we will listen to any of your concerns and try to temper your political bias or “news” anxiety while determining our best course of action. In most cases it is to sit tight and wait for this issue to pass. 

Let us know if you would like to discuss your investments or finances.