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A Message on Recent Account Activity
Rebalancing portfolios to long-term strategic targets

Key points:

  1. Markets continue to recover from the first quarter’s coronavirus-induced volatility. As we communicated in March, it is important to keep a long-term perspective and not make emotional decisions during volatile periods like we experienced.
  2. We continue to advocate that diversification across asset classes helps mitigate the risk of relying on any single investment, helps lower portfolio volatility, and helps to temper emotions during market turbulence. However, over time your investments grow more in some areas and less in others, shifting your portfolio away from the originally intended allocation levels.
  3. As a result of these shifts, the asset class investments in your portfolio may become unbalanced. Rebalancing to the original asset allocation is a process to restore your intended target allocations and risk levels. If needed, based on our recent evaluation, your account may have been rebalanced back to their intended targets.

Hello,
Our Chief Investment Officer and Research Group work with your advisor to regularly review your account(s) and evaluate whether any changes are needed. Given recent market trends, we have identified some accounts that may need an adjustment. As we’ve mentioned in previous communications, the market volatility in the first quarter resulting from the coronavirus pandemic, and the subsequent rebound in the ensuing months, has resulted in portfolios
deviating from their optimal asset allocation and risk levels.

If you do not see any changes made to your account, they were already sufficiently close to their target allocation and were not rebalanced. However, if your account was rebalanced, you will receive confirmations for these transactions. On the following page we review some of the analysis conducted as part of the rebalance evaluation.

Please don’t hesitate to contact your advisor with any questions you may have regarding how recent market activity or events that impact your financial goals or if we can be of any help. Thank you for the trust and confidence you have placed in us, we take the stewardship of your investments with the upmost seriousness and care.

The market environment and why rebalance now?

Our goal is to appropriately and effectively manage client accounts to their intended risk tolerances for their respective financial goals. Equity markets have risen higher over the last few months, and at faster rate than bonds, and therefore, in many accounts, made up more of the portfolio than intended and needed. Moreover, within the equity and bond allocations, the underlying components/asset classes had developed material deviation beyond historical thresholds that would warrant adjustments. In conjunction with those asset class deviations there are market and economic conditions which made risk management (i.e. rebalancing) appropriate, such as:

  • Many stock indices have approached, or are at, all-time highs.
  • Some sentiment indicators, such as the CNN Fear & Greed Index, are at their highest levels since May.
  • Valuations have become extended. According to FactSet, the trailing 12-month P/E ratio for the S&P 500 is 23.3, above the 5-year average (20.0) and above the 10-year average (17.7) and at its highest level in 2020.
  • Equity and bond volatility (as measured by the VIX and MOVE indices respectively) are at, or near their post-COVID lows.
  • Rising political risks such as expiring unemployment benefits, additional stimulus, election season, etc…
  • Looming geopolitical risks, particularly rising U.S.-China tensions.
  • A resurgence in global (especially in the US) COVID-19 cases, threatening the global recovery.
  • Domestically, as states continue to enforce stricter social distancing mandates, we’ve witnessed the stalling of numerous economic data points, and even an increase (first since March) in last unemployment claims.

 

Christopher Bouffard, CFA
Managing Director, Wealth Management
[email protected]

Chris Osmond, CFA, CFP®
Chief Investment Officer
[email protected]

The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”) and Prime Capital Wealth Management (“PCWM”). 

Chris Bouffard
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