Is Your Portfolio Injured? Try RICE!
Is Your Portfolio Injured? Try RICE!
Chances are that the acronym (R.I.C.E.) has not become part of your recent investment dictionary such as PIIGS or BRICS has for so many. I would encourage any investor who has weathered the past three years to consider understanding what it is...
What is RICE? Truthfully, it’s better known in the sports injury world when dealing with acute sprains, muscle pulls, or tears. R.I.C.E. stands for Rest, Ice, Compression, and Elevation. Applying these first aid measures basically helps relieve pain, limit swelling, and protects your injured muscle tissue to speed the healing process. So how does this acronym relate to an injured portfolio?!?
As we approach the midway point of 2010, it’s an ideal time to (1) Reallocate your portfolio, (2) understand where Investor sentiment is right now, (3) assess the difference between a bear market, a double-dip recession, or a market Correction, and (4) really take a hard look at what your Expenses add up to.
Reallocate- Diversify, allocate, eat your broccoli, make your bed….blah blah blah….
Yes….we get it! Every investor who can read this has heard about proper asset allocation along with life’s many other golden rules. I would argue that few people truly understand asset allocation however, and an even smaller percentage properly reallocate their portfolios at the opportune time. This lack of understanding and implementation amplifies a “hurt” portfolio’s ailments. Following periods of immense volatility the opportunity to reallocate is screaming at us! The unfortunate reality is that most investors are psychologically wired to take the exact opposite approach. The majority do not want to sell their “winners” or buy more of their “losers”. Nine out of ten people I sit with want to sell what’s doing poorly and buy what’s hot. Folks…that’s called buying high and selling low…
Investor Sentiment- The driving factor fueling investor psyches is typically fear and greed. Like clockwork it’s easy to gauge investor sentiment by simply looking at where they are putting their dollars. Contrarian investing theory suggests that when the vast majority of folks agree about a trend, they are usually wrong. This premise leads to arguments of what the “smart money” does versus the “dumb money” but I don’t quite see it exactly that way.
The importance of understanding investor sentiment is to first tune out noise from news. Unfortunately this is quite difficult without some help. Humans are naturally emotional beings and perhaps especially so with nightly newscasts using wildly descriptive market results such as “Dow Jones crashes, plunges, soars, dives, tumbles, rockets, sinks...” etc.
While we can analyze some fairly in depth tracking mechanisms such as the Investor Intelligence sentiment index, I will boil it down to something even simpler. Step out of your front door and listen to your neighbor talk about the markets. Sometimes what John and Jane are worried or excited about is very telling. Be aware of what the herds are doing with their money and don’t follow suit….at least not most of the time. A majority of investors increased exposure to stocks leading up to the crash of 2008 sold in the spring of 2009 and went to bonds. They piled more and more into bonds (and continue to do so) and missed one of the most dramatic stock run-ups we’ve ever witnessed.
Correction- On a global basis stocks rallied almost 78% in 12 months from the lows set in March of 2009. Economically, we’re no where near out of the woods yet but this massive rally should tell us that bear markets do eventually end. Are we still in one? That’s doubtful with three consecutive quarters of real growth (albeit slow) in the gross domestic product.
So many experts talk of a double-dip but before this becomes a household term, let’s understand our history. There has only been one such double-dip recession and that began in 1929-1933 and was then followed by 1937-1938. What I see as a more likely risk long-term and our reality in the near-term is that investors have simply lost significant confidence in the markets.
Regardless of what the remainder of this year holds for us, let’s be clear that markets recovering at such a clip as we have seen actually need to correct…and that’s what they’ve done. I’m not minimizing stories surrounding European debt, our unemployment woes, etc. but the market sell-off in May was not the beginning of a bear market. It was and is a correction which is more common than people want to believe. We tend to have short memories but remember that corrections greater than -10% occur on average every 2.8 years without sending us into bear market territory.
Again, I’m not cheering for more downside but historically the first correction in a new bull market comes after average gains of 57%. We approached 80% gains from the bottom so we were clearly due.
Expenses- Allow me to throw out another saying …”adding insult to injury”. This topic deserves more attention regardless of market conditions or portfolio returns. I find investment expenses especially important to consider now.
When we invest in an actively managed mutual fund we hope the managers navigate better than an unmanaged index. Let’s do more than hope they outperform an index because on average we pay 1.4% for a U.S. stock fund. Almost 70% of large cap actively managed funds lag the S&P 500 index. Amazingly enough this statistic is worse with mid and small cap funds where actively managed funds underperform passively managed indexes about 75% and 80% respectively.
Further salt is thrown on the wound if an advisor is charging you the typical 1% - 2% advisory fees in selecting these laggards. Take the time now to sit with your advisor and evaluate what you’re paying for.
The last thing I want to do is create another acronym in a world overloaded by them! What I won’t shy away from, however, is addressing the reality of a very painful economic stretch endured by so many. That being said, if I come up with a helpful tool that reminds us to focus on a few fundamental truths, we’re that much closer to being on the mend.