Worried About The Stock And Bond Markets?

by: Mark Bern, CFA

Being Conservative can pay off in the long run.

Comparing the Dow Jones Conservative Portfolio Index against major indices since 1999.

If/when inflation rises to normal levels bonds could get crushed some more.

Is this the beginning of a Bear market or just a correction?

An alternative conservative approach to investing.

On May 1, 2015 we started a portfolio called the Yankees Ultra Conservative Portfolio and designed it to compete against an average Equity/Bond Portfolio, the Dow Jones Conservative Portfolio Index (^P20GLB).

Dow Jones Conservative Portfolio Index - S&P Dow Jones Indices


The Dow Jones Conservative Portfolio Index is a member of the Relative Risk Index Series and designed to measure a total portfolio of stocks, bonds, and cash, allocated to represent an investor's desired risk profile.

Comparing a Conservative Approach to Major Indices

Historical data is no longer published for this index, though it is calculated everyday. It was $265.35 on May 1, 2015 and last Friday it closed at $280.06.

Source: Yahoo! Finance

That gave it just a 5.5% return vs. the Yankees Ultra Conservative Equity Portfolios return of 20.01% since May 1, 2015.

Well, many may laugh at a 5.5% return for the index, which is a blend of bonds/cash and stocks, but you won't be laughing for long if you look at how it did compared to the major market indices from 1999 to 2014. What follows may help you learn to respect conservative investing a little more.

Source: TalkMarkets.com

From October 22, 1999 to March 31, 2014 the Dow Jones Conservative Index returned +125.79% through two bear markets while the S&P 500 Index returned just +27.60%. And while you are at it look what the Index did compared to Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) performance during those same years.

Source: TalkMarkets.com

For about 13 of those 15 years Warren Buffett under-performed the Dow Jones Conservative Index and when you factor in inflation here is how the major indices did from 2000 to 2013.

Source: Advisor Perspectives

Being involved with the markets for some 45 years now, we have lived through many bull and bear markets and while everyone considers themselves a genius in Bull markets, they tend to find out how smart they really are in bear markets.

Bear Beginnings or Just a Correction?

We currently do not see a bear market on the horizon as the economy continues to be strong and, with the Trump Tax Cuts along with repatriation of assets from abroad, money continues to flow in. Huge tax savings should be ever present going forward for as long as President Trump stays in office.

As interest rates continue to rise, bond investors’ principal will get killed and could get crushed some more, if inflation rears its ugly head sometime during the ten years, so a conservative equity portfolio should, in our opinion, beat a bond portfolio handily over the next decade.

Inflation and Bonds

Many bond investors have been spoiled by the easy money they made from 1999 to 2014 but we remember the bond markets of 1977 when one could buy a bond for a discount off its face value of 30% or more. Investors were buying bonds at $62 with a $100 face value or a 38% discount. Interest rates under Carter erupted and as they did Bonds got obliterated. Inflation was the cause of interest rates rocketing to insane levels and if a Trump/China trade war escalates further we could see inflation show up again. We do not expect the extremes of the 1970s, but inflation is not likely to remain dormant forever.

Again, we are not predicting an imminent spike but do expect inflation to rise to more “normal” levels sometime over the next ten years as interest rates are still half their historic average. But with unemployment at the lowest level since 1969, it is important to be aware of what may be coming in coming decade, as the past ten years have shown us an incredible Bull Market that will be 10 years old on March 3, 2019.

Bull Markets usually run for about 6-7 years on average with this one going strong and it could potentially last to 2024, in our opinion, if Trump were re-elected. So, we are not worried but are just stating some historical facts and some opinions based on those facts.

The Alternative Approach

For those of you who are nervous about the markets and see interest rates continuing to rise, then perhaps the Yankees Ultra Conservative Portfolio was designed for you. It is 34% in cash and has some of the best Friedrich ideas in it. It is just one of the five U.S. equity model portfolios we manage at Friedrich Global Research, ranging from ultra conservative to aggressive growth, that also includes a dividend portfolio and a focused growth portfolio (concentrated on just a few of our best ideas).

And as you can see our Yankees Conservative Growth model portfolio has done quite well with less volatility, beating the NYSE Index, which is more aggressive. We are the red line.

Source: Friedrich Global Research

Bonds look to be a terrible investment right now so considering an ultra conservative equity portfolio may be the way to go. We are 34% cash and 66% invested holding the highest quality stocks. We think most investors should do the same in the current environment.

Getting completely out of the markets leads to missing some of the best gains historically, so we consider market timing to be a fool’s game. Keep it conservative, sticking with quality, and hold for the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.