These client notes are meant to connect you with some of the things I am working on at the moment—don’t hesitate to reply to this note with questions or comment!


I’m in Chattanooga tonight travelling back to Sarasota, but the news is stunning regardless. The UK has voted to leave the European Union which is sending the futures markets reeling, with the S&P showing a 5% loss at Friday’s open as of midnight, the largest potential drop in a long time, probably since the Greek crisis in 2013. The Yen rose strongly against the dollar as the pound fell the most in its history. How the markets will behave Friday and over the next days and weeks, no one knows of course, but we do know markets do not like uncertainty. And all we have now with the Brexit leave vote is a big bunch of uncertainty—since indeed, nothing will actually happen for some time. And how much will actually change is also unclear.

So we can anticipate that the markets will be quite jumpy in the near term. How should we respond to this period of uncertainty?

First, some perspective. Despite the hysteria in the media—which is good for the media business—the UK is still exactly where it was yesterday. It’s hard to move a whole country ‘south’ except in the popular imagination. The US markets are up this month about 0.60% as of Thursday’s close, and a modest 3.5% for the year. More importantly, the US markets are just -2.5% from the all time high of a year ago. So the decline and bumpiness we may see in coming days comes on the heels of a recent recovery of about +14% since the mid-February low when US markets fell to -16.5% below last year’s high.

Europe, and emerging markets are still -20% off two-year highs, and Asia -15%, and all three will likely be driven down by the Brexit vote, but all three are up at least +5% this year over recent lows, so there’s a little headroom.

In other words, the coming declines and bumpiness may well fall within the range we’ve already travelled this year, and not be the kind of event that shakes markets to historic lows. But, as we say, no one knows where this will go. History always becons.

That’s why for the portfolios I manage, we operate with a different mindset. It starts with looking at each individual’s household balance sheet and finding the Upside on the balance sheet—the amount of liquid investable savings that exceeds the amount needed to cover all future expenses over the rest of the household life cycle. This Upside amount we can invest and expose to market risk for long-term growth without jeopardizing the savings needed to support the ongoing household lifestyle since there will not be pressure to sell when the market declines—expenses are covered by Floor and Reserves allocations, not Upside. So losses do not need to be realized.

Instead, since we know the portfolio’s Upside allocation from the household balance sheet, I can use value averaging to buy more Upside when the markets decline at a lower cost, which significantly improves growth over time. I do this both for new and existing portfolios. (Value averaging is a form of rebalancing using target percentages rather than a target dollar amount which is common in dollar averaging).

For new portfolios where we are still building out the allocations, I may increase the Upside allocation as regions within the global market fall below their allocation target to fill that regional target allocation. This works even for partial targets as the portfolio is built up over time before it is fully allocated.

For existing portfolios I rebalance when Upside regional allocations fall more than 20% outside of their regional target percentage. This rebalancing allow us to add to those regions in the global market portfolio that are now selling at a lower cost—buying low—while we sell at higher prices those regions that exceed their targets by 20% when that occurs. Buy low, sell high!

Which feels exactly wrong if you’ve ever tried to do this yourself! No one wants to buy more when markets are falling—fear is a powerful motivator that is difficult to overcome unless you’ve done the math in advance and have the plan in place to act when the time comes. And no one wants to sell stocks that have gained so much they are over-allocated. “Let the winners run!” Wall Street says, and then they fall, and the selling/rebalancing opportunity is lost…

So a bumpy period is a busy period for me as a portfolio manager, but it is a satisfying busy-ness because it invariably adds value to the portfolios in the long run.

As these current events proceed, please let me know your concerns and questions. Meanwhile, think of periods like this as opportunities for long-term growth. And feel confortable that your needs for the short-term and beyond are well covered by a safely managed Floor that is not being tossed around by the news of the day.