A Great Defense is Often the Best Offense

As we approach the final month of 2013, we can look back at the incredible results produced by the U.S. equity markets.  If you were able to stay the course and not let some of the corrections shake you out of your long positions, then you have likely enjoyed a 25% or greater return on your investment.  There is no shortage of opinions on where 2014 may take us.  Will it be another 2013 or another 2008?  Unfortunately, without a crystal ball there is no way of knowing, so intelligent investors must manage and allocate their capital wisely.

There are several factors that may prove to be headwinds for equity markets in the coming year.  There is the potential for the “Fed Taper” to come sooner rather than later.  Equity valuations are at a much higher level than they were relative to this time last year.  There is also the inability of the exceptionally easy monetary and fiscal policy to stimulate real, inflation adjusted, economic growth and bring down the unemployment rate, resulting in shrinking top lines at the corporate level despite bottom line earnings growth.  Anecdotal contrarian indicators, such as the fact that the retail investor has just gone all-in to the equities markets in search of any kind of measurable return in the zero-rate real return environment in the fixed income markets, or the fact that the vast majority of individuals and advisors polled are now bullish with little to no bears to be found, add to the uncertainty.

All of these factors signal the potential for rough seas in the near future, and the wise investor would do well to reevaluate their portfolio and reallocate their risk.  The markets are in a constant battle between greed and fear.  Now is not the time to let your emotions control your investment decisions.  Take a good look at your portfolio and examine your asset allocation closely.  Evaluate your current circumstances to determine if now, while markets are near an all-time high, might be a good time to take some of your chips off of the table and rebalance those investments into assets that will provide a better risk adjusted rate of return.

Innealta Capital is a division of AFAM Capital, Inc., a registered investment advisor.  The opinions and views expressed by Matt Wieand or any other AFAM employee constitute judgment as of the date of publication and are subject to change at any point and without notice. Nothing presented herein is, or is intended to, constitute specific investment advice or marketing material. Past performance is no guarantee of future results. Any investment is subject to risk and possible loss of principal. This material is not an offer to sell a security or a solicitation or an offer to buy a security. Consult with an investment advisor.

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