How I Built the World’s Smartest Bear Market Portfolio

By | June 23rd, 2013 01:06 AM EST | posted in Balanced Strategy Insights, CIO Letters, Conservative Strategy Insights, Custom Strategy Insights, Emerging Markets, Europe, Global Sectors, Growth Strategy Insights, Latin America, Press Releases, Spotlight

On June 8th 2013, I received a message from a friend on Facebook. She wanted to talk to me about rolling over her 401k from a previous job to an IRA.  It’s not unusual for me to receive a message like this, but this friend is different.  She is one of the smartest and shrewdest individuals you will ever meet. I had no idea what I was in for when I began the process of helping her with her portfolio, but it was a priceless experience, and I’m hoping that sharing it will help you and other investors during the next financial storm.

How I built the World's Smartest Bear Market Portfolio

When I received my friend’s portfolio statements, I found one of the best ‘self-directed’ strategies I’ve ever seen. And she built this portfolio herself!  Typically, even the most brilliant people are over or under exposed to asset classes, own poor performing funds, and apply inadequate risk management (if any at all). I was deeply proud of my friend’s investment results, and her diligence at constructing what truly was one of the smartest portfolios I’ve seen.  Unfortunately for my friend though, her portfolio was built for a bull market, and as we’ve seen here in the past 3 weeks, the winds of fiscal policy change have engendered a down-turn in global financial markets.

I rebuilt my friend’s portfolio to perform better in the current environment of heightened volatility.  I also improved her sector and regional exposures, upgraded the funds she owns, and added an active layer of risk management.  It wasn’t easy, but when I was finished, I realized that I had just built what was in my opinion the world’s smartest bear market portfolio; not because I’m the smartest advisor in the world, but because it was an outstanding portfolio to begin with, and to improve upon it required that we combine several of the world’s best tools and tactics.  Here is how I did it:

How I built the World’s Smartest Bear Market Portfolio - by James McDonald

In really simple terms, here is what I did:

My Friends Old Portfolio:
  • Superbly priced portfolio
  • Good names but over exposed to broad sectors/economies
  • Owned ‘good, bad, and ugly’ of sectors and economies; with latter two dragging down performance
  • Not a great time to be in all Emerging Markets
  • Needs downside protection
 The Portfolio I recommended:
  • Equal or better priced portfolio
  • Good names and more targeted exposure to the best sectors and economies
  • Keep the good, exit the bad and ugly to improve performance
  • Reduce Emerging Market exposure, and isolate it to regions with the best outlook
  • Build in risk management allocation for downside protection

If you want to see more specifics, here’s a tear out from her actual 2nd Opinion document:

How I Built the World’s Smartest Bear Market Portfolio

Of course I didn’t know when I built what I felt was “the world’s smartest bear market portfolio” on June 13, that a week later global markets would collapse in the greatest selling wave seen since the financial crisis in 2008.  The new bear market portfolio weathered the downturn  much better than my friend’s previous portfolio.  In fact, the size of loss prevented in just the past week exceeded our entire annual fee to manage the portfolio.  Now that’s a super smart portfolio for a super smart investor!

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Sources: Index Strategy Advisors, Inc.. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of its stamped publication date, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Index Strategy Advisors to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.