March 7, 2013
Finally Time to Rethink POLICY?
At the close of 2008, when the equity markets were in free fall, many clients outwardly questioned the level of their equity market exposure. “Maybe 75% equity is too much for us. Maybe we should have never been above 60%,” they said. We replied that reducing equity exposure after a significant stock market selloff was exactly the wrong thing to do. We were firm, saying that we wanted to maximize exposure to global equity markets and that the time to consider reducing the range of equity exposure as reflected in policy was when the stock market was at least fairly if not overvalued.
Today equity markets are approaching fair value. This is the time for that conversation.
This does not represent a reduction or elimination of our current active equity overweight.
We have been overweight equities since January of 2009, and we remain overweight to equities. While the global equity markets have risen substantially since 2009, they are just fairly valued today with cash investments returning almost nothing and bonds significantly overpriced. So, compared to cash and bonds, stocks are still most attractive, by far.
It is important to understand the difference between policy and strategy. Going back to those client conversations in 2008, a portfolio with a 70% target for global equities and a range of 65% to 75% around that midpoint represents very different policy (with different expectations of volatility and return) than one with a 50% equity target and a range of 45% to 55% around that midpoint.
In both those cases, we would be at the top of the equity range today. That is our STRATEGY decision.
Whether the 70% midpoint or the 50% midpoint is right for you as an investor is a POLICY decision.
Now is the time to reopen the discussion that we convinced clients, over 4 years ago now, to defer.