Monthly Outlook: February 2024

It’s been a terrific three months in markets. And we’re talking all markets, Bonds, US Stocks, INTL Stocks – they’re all trending higher. As a result, we’re still “all in” for growth and our portfolios are up about 11% over the past several months. Investors seem optimistic about the potential of AI (artificial intelligence) and the hope for interest rate cuts. And so far, the economy remains fairly strong and corporate earnings are still growing. So up, up we go!

Last year, Technology, Communications, and Consumer Cyclicals were the super-star sectors of the market. We call them “US Growth”, collectively. And just seven stocks, the “Magnificent Seven” contributed about 73% of the total S&P500 return. Already this year, we’re seeing a broadening out of returns as other sectors (Financials, Healthcare, Energy, etc.) and other markets (Bonds, US Value, and INTL) are trending higher, too. We wouldn’t be surprised if the Magnificent Seven stocks do okay in 2024, but fail to repeat its super-star status.

Investing is Like Driving a Car   

We often compare portfolio management to driving a car. We start by asking questions about where you want to go (objective), what kind of ride you can tolerate (volatility), and what metrics we will use to judge whether we were successful in meeting your expectations (benchmarks). We’ll come to an agreement about the overall destination and route (asset allocation), and then it’s up to us to drive and get you there. We keep you updated along the way (performance reports).

A good portfolio manager has to stay disciplined and keep focused on the road ahead. There are always conflicting road signs, opinions on the radio, and sometimes a little advice from the back seat. When roads are clear, (markets are trending higher), we have to hit the gas and maybe speed a little to make up time and returns (buy fully). When there are road hazards, (markets trend lower), we need to use our brakes to slow down, (sell a little), and avoid crashes and losses.

Most portfolio managers act as if they went to the same driving school. They load the portfolio with roughly the same mix of assets, 60/40 (stocks/bonds) for conservative growth and 80/20 for aggressive growth, and so on. Some managers use individual stocks and bonds, some use mutual funds, and others prefer low-cost index funds. Honestly, it doesn’t matter that much. What really matters is how the portfolio manager manages the mix, or asset allocation.

Most managers maintain a static asset allocation, or buy and hold strategy, in other words. That’s like setting the car to cruise control at 60/40 or 80/20 and ignoring all the curves in the road, the hazards, and the risks. Sometimes driving 60mph is just too slow, and sometimes 60mph would feel terrifying. Roads are variable, the world is variable, and portfolio allocations should be variable. For some reason, this kind of thinking is considered blasphemous to the financial industry.

Our iFolios Strategy Adds Brakes

You can drive faster if you have big brakes. Think about it. Most passengers want to “get there and not crash.” Similarly, most investors simply want to make a lot of money without big drawdowns along the way. Our iFolios investment strategy was designed with that dual goal in mind. Like most managers, we build portfolios with a target of 60/40, 80/20, and so on. And we prefer to build portfolios with index ETFs. No problem with any of this. The big difference is that iFolios adds brakes.

Having brakes doesn’t mean we have to use them. History shows us that markets have trended higher about 80% of the time. We’re in one of those periods right now, as we said in the opening paragraphs. It’s time to hit the gas, and keep our feet off the brakes. But we all know there will be hazards ahead at some point and brakes will be needed. There are signs of economic slowing (yield curve, unemployment rate), and multiple hot spots around the world that could erupt into war. Also, it’s a Presidential election year that is sure to be volatile. When the time comes, we’ll use our brakes and sell markets that start to trend lower. We’re trying to get you to your destination quickly, and with comfort and confidence.