In Volatile Market, What We Own, and Why: Our Stock Positions

The market seems to be giving us some relief on Tuesday from Monday’s selloff. However, equities are showing a loss of 14% for the month, and there will likely be additional volatility before August is over. That being said, a review of our positions may be in order. We will start the morning with a discussion of our equity holdings, followed by an analysis of our fixed income and alternative positions later in the day. 

An important part of this conversation is answering the question “Why own stocks in the first place?”  Stocks are, over the long run, one of the best investments for protecting investors from inflation. They are liquid, well regulated, and can provide important dividend income. Clients would be hard pressed to meet their investment objectives without owning some stocks. Even in the face of the “lost decade,” where stocks have lost ground during the 2000s, they have been a good long-term investment for clients able to withstand market volatility. 

The last statement is an important caveat. If investors had too much committed to equities, they tend to exit at the worst possible times due to the extent of their losses. In many cases, they mistime their entry point – which can cause further loss, frustration, and in extreme cases a cessation of investing.  As a result, these clients are unlikely to achieve their investment objectives - a truly unfortunate outcome.

Equities:  We have a strategic “tilt” toward large cap stocks over small cap stocks.  We prefer the stock of larger companies mainly due to the reduced volatility versus that of smaller firms.  Also, larger companies tend to generate more revenue internationally than other firms.  Nearly half the profits from S&P 500 companies are from outside the U.S. Owning large stocks allows us to participate in the growth of developing and established countries.

Of course, we also own foreign stocks directly.  Our current holdings include emerging market equities (EEM) and Japanese stocks (EWJ). We like the former due to the impressive economic growth of many developing economies.  Most of these countries have much better balance sheets than the developed world, with less debt and an impressive trade surplus. Japan represents, in our view, a significant value play. Japanese stocks are some of the cheapest in the developed world. This position has added some value during the year, and specifically during the market deluge, as the modest valuation of this position has acted as a “back-stop.”