We just completed a series of Investment Committee (IM) meetings to review our portfolio strategy. We started with a view of the world’s investable capital and how it is distributed. The purpose of this exercise is to become more informed on the changes to the relative size of the various markets and to relate that information to our asset allocation decisions. For example, U.S. Stocks represent 14% of the $104 trillion global market, while emerging market stocks represent 2.6% of the entire market.
Next, we develop our risk models to make decisions on the basic asset classes, stocks, bonds, commodities and cash. We then decide how much we want to allocate to domestic vs. international in these categories. The process continues to drill down further. For example in the bond class we decided how much exposure we should have for international and within international, how much should be allocated to emerging market bonds. As you can see, this takes some time to complete. Only after we have identified all the sub-categories, do we begin to select specific investments for each category.
During the process we remain focused on the long-term, but remain vigilant that there are shorter term events that can impact our portfolios. However, the outcomes of these events are currently unknown. I keep reminding everyone that while we may know what needs to happen, we need to base our decisions on what is likely to happen.
Here are some of those short term events in the U.S. that we are watching:
- During this quarter, Congress will vote on the 2012 Budget Appropriations Bill
- On November 23, 2011 The Super Committee will make its recommendations for cutting the U.S. Budget
- During first six months of 2012, the Presidential primaries will make clear who the Republican Presidential candidate will be to run against President Obama in the November election
- Sometime in the summer of 2012, The Supreme Court will begin reviewing the Obama Health Care Mandate
- In November 2012, the Presidential election will be decided
Each of these events will help us become clearer on the direction of our economy. Keep in mind that markets climb a wall of worry. The market is a discounting mechanism for the future of our economy. It will begin anticipating the outcome of the election sometime in the first or second quarter of next year.
There are many other global factors that need to be considered in our decisions. The European situation will have to be resolved one way or another. They need to choose the least destructive path for the citizens of the European Union (EU).
As these events unfold we will gain more clarity. In the meantime, we remain very defensive and flexible with our portfolio strategy.
We will begin implementing changes to our strategy this month. It calls for rebalancing some of the asset classes and a change to some of the funds we want to use going forward. As always, if you have any questions about your portfolio, please call and we will be happy to discuss.
Wishing you all a great Thanksgiving holiday!