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It’s a Whole New World

So much has changed in our lives in 2020.  Everyone is feeling stressed.  Here are a few of today’s top stressors.  It’s not a complete list.  What are your top 5 stressors?  And what does it say about our current situation if you have difficulty limiting your list to just 5?

 

Pandemic

Sickness and death

Lockdowns

Job loss/Furloughs

 

Protests

Wild Fires

Hurricanes

Floods

 

Violence

Cabin fever

Socialism

Fascism

 

Systemic bias

Homelessness

Isolation

Food Insecurity

 

Depression

Sense of loss

Sickness

Fear of dying alone

 

QAnon

Political extremism

Quarantine

Conspiracy theories

 

Weight gain

Political protest

Racism

Unconscious bias

 

Nationalism

White Supremacy

Proud Boys

Police shootings

 

Hate speech

Extreme partisanship

Pizzagate

Hatred of elites

 

Hospitalization

No Funerals

Antifa

Climate Change

 

Election fraud

No Weddings

Masks

Mass Shootings

 

Fact checking

Fox News

Hannity

Rachel Maddow

 

Racial Justice

Institutional Norms

Deep State

Social Distancing

 

Fake News

Foreign Interference

Hate Speech

Disinformation

 

Loss of Civility

Media Bias

Propaganda

Intolerance

 

You’ll notice that “investment performance” is not on the list.  Developing and implementing your investment strategy is my job, not yours.  I’m good at it because I have the time and interest to consistently learn.  I’m constantly seeking out new ideas to minimize risk and maximize future returns.  Managing risk is my specialty.  Diversification, strategic thinking and careful research are my primary tools.

Covid-19 is disrupting societies, economies, and markets around the world like no other crisis since World War II.  Policymakers, health workers, business and investors have been caught flat-footed, and without a playbook.  Adoption of trends that were already well underway have accelerated at a breathtaking pace, and new trends have emerged.  Working from home, online grocery delivery, home fitness, online education, relocation from cities to suburbs, online shopping, restaurant delivery, e-sports and video games, and dozens of other new trends are now firmly in place and here to stay.  Change is always stressful, especially when the speed is breathtaking.  When it comes to your investment portfolio, you can relax and take a deep breath.

I’ve spent much of the past 6 months rethinking investment strategy to adapt to the new realities.  I’ve attended two week-long strategic investing conferences for investment professionals.  I’ve participated in dozens of daily webinars hosted by fund companies and industry leading educators.  Both of the strategic investment conferences (originally scheduled for Phoenix and for Sydney) were virtual online events this year.  I’ve heard from 60+ leading investment thinkers from around the world.  I’ve listened to podcasts and finished more than a dozen audible books online.  The voices included portfolio managers, CIOs, senior investment analysts, investment strategists, economists, independent consultants and practitioners. Each offers his/her best high conviction ideas on contemporary and emerging portfolio construction strategies, to help us build better quality investor portfolios in a whole new world.

Even as I continue my own education, I’ve been busy making strategic changes to our investment strategy and investment selections.  This was necessary as the rules have changed. 

First, it’s important to understand that you remain highly diversified across 20 different asset classes, each chosen for specific reasons.  That part has not changed.  The changes I’m referring to are occurring within each of the asset classes.  Each change will be highlighted in some depth below. 

My goal is always to minimize risk and volatility while achieving market-like returns over time.  Like pieces in a puzzle (or players on a sports team), each asset class plays a very specific role in portfolio construction.  Some benefit from inflation.  Some deflation.  Some from economic growth.  Some from economic slowdown.  Others from rising interest rates.  Others from falling rates.  I could go on.  When we put them together, the whole is greater than the sum of the parts.  And each part is absolutely necessary to fully maximize the benefits for the whole.

A robust, carefully constructed investment portfolio with routine tax-aware rebalancing protects us from the negative consequences of making reactive investment decisions.  It avoids adverse outcomes that typically result from undisciplined portfolio decisions and unpleasant surprises on your tax return.  But a thoughtful strategy and robust framework is not enough.  Investment processes must be flexible enough to shift with changing paradigms, to avoid introducing unintended risks into portfolios.  It helps to have a clearly articulated and defined investment philosophy and framework to overcome our human tendencies, and successfully navigate treacherous conditions such as those experienced in 2020.

For the past 50 years we’ve lived in a period of mostly declining interest rates.  Rates have fallen from more than 20% in the early 80’s to negative in some parts of the world today.  That represented a tailwind for stocks, bonds and real estate for most of those years.  Returns of 8% to 10% were common during much of our investing lifetimes.  A new reality has now set in.  Today rates have nowhere to go but up.  Valuations are stretched by historic standards.  Demographically most of the developed world is aging and exiting their most productive years.  Economic growth and the investment return that it generates are increasingly harder to come by.  Much of the growth we have seen in recent years can be directly attributed to Fed policies that effectively pull future returns forward.  As a consequence, Investment returns for diversified portfolios are likely to average no more than 4% to 5% per year over the next 5 to 10 years.  This is the consensus among most economists and Wall Street banks.  Northern Trust was the latest institution to lower their long-term return forecast to 4% just last week, joining JP Morgan, PIMCO, and others (see the “Ivy Portfolio Index” attached).

Meanwhile, central bank “money printing” to prop up the economy has added increased risks to the financial system including the fear of resurgent inflation or even a potential monetary collapse.  A global pandemic still has yet to run its course, potentially leaving a path of both physical and economic pain that has yet to be fully realized.

We are entering a period of great unknowns.  The greatest minds of our time are wise enough to know that we have never been here before and none of us can accurately predict where we’re going from here.  Depressed yet?  Don’t be.  A lot of good things are happening at the same time.

A bull case can be built on the fact that we’re entering a period of great technological innovation and dramatic increases in productivity.  Self-driving cars, 3-D printing, “internet of things”, wearable technology, cloud computing, genomic engineering, robotics and artificial intelligence are disrupting and revolutionizing our world. 

A bear case can be made that these disruptive technologies are resulting in rapid change that may be beyond our ability to cope – at least in the short term.  Just ask Alexa if you’d like to know more! 

While I am a long-term optimist, I place no short-term bets either way.  Your portfolio will help us prepare for all possible scenarios.  There will be winners and losers among your 20 asset classes.  That is by design.  You’re positioned for all possible scenarios.  No matter which scenario unfolds and at what pace, your portfolio is designed to produce market-like returns with as little drama as possible. 

Here’s a brief description of some of the changes that I’m begun making inside the 20-asset class structure of your investment portfolio.  Note that underlined names and phrases in blue are links to more information.  These changes will better position us for success in this new world:

Equities:  Broad-Based

US Large Cap Stocks: No doubt that you’ve heard that a handful of stocks now make up more than 25% of the market capitalization – Facebook, Apple, Amazon, Netflix, Google (FAANG).  In fact, the largest 50 of the 500 companies that make up the S&P 500 index now represent well over half of the S&P.  Even as these top 50 have become quite expensive, many of the 450 remaining offer compelling values.  I’m focusing on individual companies that produce high “free cash flow”.  These are solid companies that generate cash income beyond what is needed for reinvestment in the businesses.  Many of these companies pay solid and sustainable dividends, can add value by buying back stock, and have solid earnings growth prospects for the future.  These are the “Cash Cows” of the S&P.  The Pacer US Cash Cows 100 ETF (symbol COWZ) has been added to your investment portfolio along with some individual companies that I believe offer compelling value that fits this theme.

US Small Cap Companies:  Smaller companies tend to be more volatile than large companies, but as a group they have historically offered better investment returns over long periods of time.  The Pacer US Small Cap Cash Cows 100 ETF (symbol CALF) has been added to your portfolio along with some select smaller capitalization companies that offer strong free cash flow, compelling valuations and solid growth prospects.

Int’l Developed Market Companies:  International stocks are currently less expensive than their US counterparts.  This may reflect the higher weight of high-flying technology names in the US indices.  International companies also offer geographic diversification and currency diversification in an uncertain world.  The Pacer Developed Markets International Cash Cows 100 ETF (symbol ICOW) includes international companies with selected for their strong free cash flow and stable dividends.

Emerging Market Companies:  Emerging market stocks are a different animal, so to speak.  Here we want Cheetahs, now Cows.  Emerging market countries are where we were back in the 1950’s.  Here we look for fast growing companies that are best positioned to capitalize on the rapid population growth in the developing world.  The Emerging Markets Internet + eCommerce ETF (symbol EMQQ) and the Columbia Emerging Markets Consumer ETF (symbol ECON) avoid the problem of inefficient “state-owned enterprises” that dominate many broad-based emerging market funds.

Equities:  Natural Resources & Basic Needs

Energy & Materials Companies:  The fossil fuel industry is dying.  Rapid advances in technology and reduced costs are catapulting clean energy companies focused on solar, wind, geothermal and battery technologies into taking their place.  I’ve been exiting all broad-based energy companies relying on fossil fuels in favor of renewable energy ETFs and individual companies that are leading the charge (pun intended).

Food & Farmland Companies: The world’s population is growing – and through good times and bad –– we all have to eat.  I’m now supplementing the two industry ETF stalwarts, VanEck Vectors Agribusiness ETF (symbol MOO) and iShares MSCI Global Agriculture Producers ETF (VEGI) with companies like Farmland Partners which owns 158k acres of farmland and Gladstone Land which owns 88k acres.  I’m also supplementing the broad-based food and farmland ETFs with individual companies including leaders in the plant-based foods revolution such as Kroger, Beyond Meat and rapid growers like United Natural Foods.

Water & Environment Companies: Water is the new oil.  We all take it for granted.  And why not?  We turn a tap and out it comes.  But that’s about to change.  The basic problem is that the quantity of water in the world is finite, but demand everywhere is on the rise.  Water is considered an “axis resource”, meaning it’s the resource that underlies all others.  So, whether you’re building a computer chip, or growing crops, or generating power, all these things require lots of water.  We invest in ETFs like the Invesco S&P Global Water Index ETF, and individual industry-leading companies such as  Veolia , Xylem and Consolidated Water.

Timber Companies:  A unique characteristic of timber companies is that their inventory keeps appreciating in value even during recessions – as their trees continue to grow during good times and bad.  Lumber is also used primarily in the single-family home market, which is booming during the pandemic as people leave high-rise living in cities for work-at-home solutions in the suburbs.  We invest in both iShares Global Timber & Forestry ETF (symbol WOOD), and directly in Weyerhaeuser, the largest landowner in the United States with 12 million acres of timberland under management.

Fixed Income:

Cash & Currencies:  This is our dry powder.  There are times when cash is king even when the yield is next to nothing.  The US dollar has been on a long run versus other countries for more than 20 years.  With the current unprecedented pace of Fed money printing, some believe that that this trend is long in the tooth.  For that reason, and to hedge our bets, we are beginning to include foreign cash in the mix through currency ETFs.  Favorites include the Australian and Canada dollar (commodity currencies) and the Swiss Franc (which has a long history of responsible management of their currency).

US Bonds: Historically the least risky asset class may now be the riskiest of them all.  After 50 years of declining rates (which causes the prices of existing fixed-rate bonds to rise in value), many of us wonder how much lower they can go if at all.  Nonetheless, bonds remain an important diversifier.  We avoid the risk of rising rates by focusing on bonds with short duration, inflation-protected bonds, variable rate bonds, and bond substitutes like new products such as Cambria Tail Risk ETF (TAIL), which invests in a combination of US treasuries and “put options” on the stock market that would rise in value significantly in the event of a sizeable market downturn. 

International Developed Market Bonds:  Our focus here is on currency diversification to reduce the risk of decline in the US dollar and inflation-protection through TIPS purchased from major developed issued by responsible governments including Germany, Spain, the UK, Australia, China and Japan. 

Emerging Market Bonds:  Bonds issued by developing countries offer both currency diversification and high yield.  Today emerging market countries like South Korea, Indonesia, Malaysia, Taiwan and the Philippines often have stronger balance sheets and less debt than many of their developed market counterparts.  These countries have younger populations and better growth prospects than their more highly developed competitors.  In that sense the bonds of these countries may be mispriced, leaving room for significant appreciation in addition to their already high yields. 

Real Assets & Alternative Diversifiers

US Real Estate:  There is something to be said for physical assets that we can feel and touch, and which don’t become obsolete when someone invents new software code, a faster computer chip or better high-tech mousetrap.  Shopping malls and office buildings may be in secular decline, but apartment communities in low tax states, senior housing and datacenters in suburban markets are on the ascendency.  Income-producing real estate provides low risk and solid dividends as long as one doesn’t bet too heavily on particular types and locations.  We are now supplementing broad-based REITs with companies that own senior housing, medical offices, apartment communities in the Sunbelt, distribution warehouses and cloud-based datacenters that are in increasing demand all over the country.  REITs currently produce dividends of 4% to 5%.  Even assuming no appreciation in asset values, this asset class offers solid returns.  Given the tax structure of REITs, we typically hold real estate investments in tax-deferred retirement accounts whenever possible.   

Global Real Estate:  If real estate itself is a good diversifier, owning it globally magnifies the diversifying properties.  Cell towers, data storage facilities, and cloud-based data centers are exploding in demand worldwide.  We own US domiciled REITs that maintain real estate holdings worldwide.  Yields here are even higher than with US properties, averaging 6% to 7% globally. 

Global Infrastructure:  Highways, bridges, and airports make up the bulk of publicly-owned global listed infrastructure, but the fastest growth is coming from the rapid expansion of critical infrastructure that uses smart technologies. Years of dithering and missed opportunities in Washington have forced innovators and investors alike to create their own infrastructure boom. With the economy crying out for stimulus and an election on the horizon, these companies may finally be ready to rebuild the nation and the world.  Regardless of which party wins the US election, it’s a safe bet that we will be heavily investing in rebuilding our infrastructure beginning next year. Rebuilding infrastructure means new jobs and economic growth, which may be sorely needed as we come out of the pandemic and face dislocation in so many service industries.  We are getting ahead of this curve by investing in Global X US Infrastructure Development ETF (symbol PAVE) and SPDR S&P Kensho Intelligent Structures ETF (symbol SIMS).  The former invests in traditional companies that benefit from infrastructure development including railroads, engineering companies, heavy equipment makers and contractors.  The latter focuses on smart building infrastructure, smart grids, intelligent transportation infrastructure and intelligent water infrastructure.  This category could explode upward when Congress and the President get serious about rebuilding our infrastructure and stimulating the American economy in the process.

US Energy Infrastructure:  We’re gradually exiting the oil and gas pipelines that once dominated this category in favor of progressive utilities that have embraced new technologies including solar, wind, nuclear and other non-fossil fuel source of energy.  We remain partially invested in Kinder Morgan, an energy pipeline company that is expected to benefit from consolidation of the remaining US pipeline infrastructure as they gobble up weaker players.  It doesn’t hurt that Richard Kinder, one of the greatest minds in the energy industry, owns 10% of the shares.

Gold & Gold Miners:  The Federal Reserve can print money, but they can’t print gold.  Gold has historically performed well during deflationary periods when fear is high and when low interest rates make the carrying cost low.  Gold also performs well in inflationary periods when confidence in paper money is waning.  Our gold holdings are diversified in vaults throughout the world including London, New York, Frankfurt, Perth, Toronto and Zurich.  We also hold companies that own gold in the ground in the form of the gold miner ETF iShares MSCI Global Gold Miners ETF (symbol RING) and individual gold mining companies such as Newmont (symbol NEM).

Commodities:  Commodities are turning in a solid performance in 2020.  The category includes oil and gas, agricultural products, industrial metals, and precious metals including silver, platinum and palladium – many of which have industrial uses in technologies of the future.  Most importantly, commodities are a tangible real asset that outperforms when the US dollar is weak, as it was for most of 2020 to date.  Commodities are in finite quantity and extraction involves significant costs, offering a thesis for increased scarcity as population growth continues around the world. 

Innovation:  This is the most exciting category to talk about.  It’s all about the future, except that the future is now.  Innovation has persisted throughout the course of history; but it has not always progressed in a predictable or linear fashion.  Innovation is episodic.  Periods when we have seen increases in rapid adoption of new technologies typically coincide with sustained and accelerating economic growth.  I believe that we’re now living through a 4th industrial revolution and that is driving the current pace of innovation in the marketplace.  Building on the 3rd (a digital revolution occurring since the mid-20th century), the 4th reflects many technologies – blurring the lines between physical, digital and biological spheres.  Innovation is everywhere.  It can be found in any part of the economy regardless of sector classification, market capitalization or geographical location.  That’s why I’ve created a space for innovation as a separate asset class.  The companies that are leading this revolution don’t necessarily fit in any of the other 19 categories.  Some of them are small and not yet profitable.  They don’t always appear in other broad market indices.  There are 5 platforms of growth that will generate significant economic value over the next 5 to 10 years:

·        Global E-commerce.  Beyond companies like Amazon and Alibaba – who have penetrated industries like travel, books, household products, groceries, office supplies and media – I see significant opportunities in fashion, autos, travel, ride sharing, restaurant delivery and even textbooks.  There are opportunities in payment companies that are easy to use and add security and safety to the system.  Drone manufacturers and other ways to delivery packages are also potential areas for investment.

·        Genetic breakthroughs.  The genetics industry is on the cusp of creating meaningful advances in diagnostics and therapeutics, and even in areas like agriculture and artificial intelligence applications.  Human longevity and aging may even be manipulated through advances over the next 10 to 15 years.

·        Intelligent machines.  Artificial intelligence or machine learning is permeating every layer of product development. If the past 30 years we spent time collecting and organizing data with mainframes, personal computers and mobile phones.  The next 30 years could be set up to take that data and change our lives in the physical world.  The future of production will include individualized products designed to the needs of the customer.  Efficiencies in the design and manufacturing process, employing robotics, 3D printing, and manipulation of massive amounts of data, will enable that level of specificity and customization.

·        New finance.  Efficient pricing and methods of payment are advancing and being adopted rapidly.  Methods of exchange are evolving with trends in e-commerce, allowing mobile payments and digital wallets to gain traction. This is especially true in developing countries that lack the advantages (or burdens) of a brick-and-mortar banking infrastructure.  In many poor countries, payments by smart phones have already completely replaced paper currencies and the need for bank accounts or credit cards.  FinTech is a merging of finance and technology and rapid adoption is already underway everywhere in the world.

·        Exponential data.  Our ability to collect, store and deliver data to create more efficient marketing and distribution has taken a major leap forward in recent years and is growing exponentially.  That requires massive amounts of datacenters, fiber-optic cable, and cell towers.  Advances in artificial intelligence, computing power and memory are allowing us to fully exploit that data.  The creation, cleaning, storage, and delivery of data will lead to new applications like augmented and virtual reality, artificial intelligence & machine learning, software as a service, and the sharing economy.  Some have postulated that data is becoming the new oil.  I agree.  

We are covering this space through a variety of thematic ETFs focused on the innovators that are changing our world.  These include The SPDR Kensho New Economies ETF  (symbol KOMP), the iShares Exponential Technologies ETF (symbol XT), the ALPS Disruptive Technologies ETF  (symbol DTEC), the ARK Genomic Revolution ETF (symbol ARKG), the iShares Robotics and Artificial Intelligence ETF  (symbol IRBO) and the iShares Cybersecurity and Tech ETF  (symbol (IHAK). 

Hedge Strategies & Macro Trends:  A hedge is a risk management technique to minimize volatility, reduce risk and improve performance.  Hedge funds have historically used complex techniques such as long/short equity strategies, put/write and covered call options strategies, leveraged dividend strategies, merger arbitrage and tail risk management techniques to achieve these objectives.  Other techniques include momentum and macro-trend following strategies designed to exploit market inefficiencies.  We use several well-regarded ETFs to cover this asset class including the Direxion Work from Home ETF (trend following), the AFGiQ US Market Neutral Anti-Beta Fund (long/short equity), Blackrock Enhanced Equity Dividend Trust (leveraged dividend), the Quadratic Interest Rate Volatility and Inflation Hedge ETF  (tail risk), the Global X NASDAQ 100 Covered Call ETF  (options) and the Amplify Transformational Data Sharing ETF (macro-trend) to gain exposure to transformational blockchain trading technology (which goes well beyond crypto-currency applications).

Conclusion:  If you’ve made it this far, you now have an appreciation for how I spend my time.  Roughly half of my time is spent educating myself and applying what I learn to portfolio construction.  The other half is implementation and responding to individual client needs.  My goal is always to help you achieve your goals as articulated in your financial plan.  The strategy is always evolving in an effort to better manage risk and take advantage of new opportunities as they emerge.  New ideas are constantly being considered for introduction to our disciplined investment framework.  The goal is always to minimize risk, reduce volatility and generate strong long-term returns as we work together to achieve your financial goals.  The goal is simple.  The challenge lies in the design, the implementation and the rebalancing discipline.  That’s my job.  One less thing for you to stress about as we move forward together into this Whole New World. 

An Exponential Ride
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Contact Info

Comprehensive Money Management Services LLC
535 Vilabella Avenue
Coral Gables, FL 33146
Phone 305-662-7757
Fax 305-402-8409
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Disclosures

Comprehensive Money Management Services LLC (“CMMS”) is a Registered Investment Adviser located in Coral Gables, Florida. The firm is registered with the State of Florida Office of Financial Regulation. CMMS and its representatives are in compliance with the current filing requirements imposed upon Florida-registered investment advisers and by those states in which CMMS maintains clients.

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