On Braking & Portfolio Construction

Mountain biking.

Sounds easy, right?

It can be at times ... riding a bike up and down the gentle slopes of a mountain through a pristine forest is pretty easy. But true practitioners of the sport seek the challenge and stoke of barreling down a steep two-to three-foot wide single-track trail inches away from boulders, tree trunks and cliff edges.

Speaking from experience, most of the thrill from this type of ride is forcing your mind and body to be completely dialed into the ride when everything just flows ... it really cuts the chatter in your mind so that your body is focused on putting you and the bike exactly where it needs to be at the right speed at all times to make the next steep climb or avoid a wipeout. When you achieve this altered "flow state," things start to move in slow motion and the ride is pure joy. If your mind wanders at high speeds, you are almost guaranteed to be out of position for a climb or worse — disaster in the form of a separated shoulder or broken hand (again speaking from experience).

After recently wiping out after failing to brake early enough going into a turn, it got us thinking about braking in terms of investing. Of course, braking at the right time to correctly position yourself for a turn is an extremely important skill and quite possible when riding a mountain bike. But when you are investing, you never know when the turn is coming (no matter what any financial pundit says). Brake too early when the market is rising, and you can miss out on big future gains in the market; brake too late after the market falls, and you can lose a lot of money.

Equities dominate most investors' portfolios and get the most attention, especially now since the year-to-date move has been very strong (global equities are up over 14% as of July 31st). But the market can correct at any time. According to a recent Bloomberg article, “...it’s certainly been a while since anything bad happened in the U.S. [equity] market. An AB [AllianceBernstein] study shows that while 5% declines have occurred on average every 10 weeks since 1928, you have to go back 56 to find the last one. Ten-percent corrections usually happen every 33 weeks, compared with more than 75 today. Bear market drops of 20% occur every 127 weeks. The last one of those came in early 2009.”

Our approach to investment portfolio construction — diversified asset allocation — helps to brake when necessary and keep your "speed" and equity market corrections under control. By adding additional asset classes that are not correlated to equities, such as fixed income, real estate and infrastructure to a portfolio, any correction in equities will not necessarily cause a wipeout because the non-equities should behave differently and allow you to safely take the turn!

* August 10, 2017
This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  The opinions expressed do not necessarily reflect those of author and are subject to change without notice.  Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials.  Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment adviser does not imply a certain level of skill or training.