Investment Update: February 2022

Given the recent market volatility, I want to update you on how we are managing your portfolios.

We are reviewing each account and making any necessary adjustments to reflect your personal investment strategies.

Update on Your Investments

As recently mentioned in the quarterly newsletter in January, your investments entered the new year with a moderately cautious stance.  High valuations, less favorable growth, and rising interest rates motivated us to enter the year with some caution.

A month later, we still remain of that view, though we have made some tweaks in your portfolios.

We increased allocations to precious metals by increasing gold and adding silver.  Both of these metals might benefit from several things.  Persistent inflation, questions about the US Dollar, and rising macro risk (mainly economic, potentially geopolitical) potentially might offer positive diversification.  (In other words, precious metals in certain situations might offer positive returns even with choppy equity and fixed income markets.  Naturally, precious metals might also lag if markets were to resume a solid rise, as they did in 2021.)

Consequently, we have also raised cash and reduced exposure to fixed income.  Despite the recent increase in market interest rates, they still do not appear attractive.  When adjusted for inflation, interest rates of 10-year bonds remain negative.  We would anticipate using cash to make further adjustments to portfolios.

Your existing exposure outside of traditional equity and fixed income might also provide diversification benefits.  Your investments in alternatives, including broad commodities and a hedged long/short manager, might continue to offer returns that do not move with falling stock and bond prices.

On a selective basis, we have also done some tax harvesting.  Given most assets appreciated in 2021, it was difficult to find opportunities to pass on tax savings to those of you with taxable accounts.  In contrast, 2022 has offered some opportunities.

Realizing tax losses while maintaining (or reducing) investment positions might allow flexibility later in the year for us to reallocate risk.  For instance, in some cases, we might choose to sell shares with gains that would be offset by the realized losses taken now.  If we do not do anything for the rest of 2022, taxable investors might gain the benefit of capital losses on their taxes filed next year.

How are we able to do this?

The plethora of investments in today’s markets give taxable investors a lot of flexibility.  It is possible, for example, to maintain one’s exposure to large US stocks and harvest capital losses.  One could sell one Exchange Traded Fund (“ETF”) and buy a different ETF with similar (or identical) exposure.

We remain vigilant of market risks and opportunities.  Our bias remains moderately cautious, particularly on most fixed income and equities.  As opportunities or risks present themselves, we anticipate making more changes to your portfolios.

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