• Mike Komara

Grateful For Our Rules-Based Process

"I would maintain that thanks are the highest form of thought; and that gratitude is happiness doubled by wonder." — G.K. Chesterton

“What’s there to be grateful for?” Given the steady supply of negativity experienced over the last few years, this is a rational and too-often-asked question. To many, gratitude does not come naturally.

However, just like successful investing, having a process for practicing gratitude makes all the difference. Research shows that having such a process consistently produces benefits, from enhanced immune systems to improved sleep.

In this blog, we take part in the practice of gratitude. We are grateful for the inherent features and benefits that come from our rules-based process. But most of all, we are grateful for our clients for their trust, kindness, and commitment to their financial plan.

Asset Level Overview

Equities and Real Estate

Up until the Thanksgiving holiday, equity markets in November looked very much like they have throughout most of 2021. Nearly all segments were enjoying positive months, with U.S. large caps leading and international markets positive though underperforming slightly. The emergence of the Omicron variant of COVID-19 quickly changed that. Equity markets across the globe dropped sharply, temporarily pushing monthly returns into the red. In the case of emerging markets, returns are now negative for the year.

Though jarring, the decline in U.S. equity prices is not enough to impact trends, which remain positive. Hence, allocations to U.S. stocks will not decrease and will actually increase due to taking on exposure from emerging markets, which have formed a long-term downtrend. Both emerging and foreign developed markets continue to have intermediate-term downtrends. Overall, international markets exposure is now near minimum allocation levels due to our process favoring their much stronger U.S. counterparts.

Real estate securities also declined on the news of Omicron, but like the rest of the U.S. equity landscape, the asset class remains locked in uptrends. As a result, there is no change to exposure. This segment continues to have the strongest performance of 2021.

Fixed Income and Alternatives

The flight to safety stemming from the Omicron news benefited nominal fixed income instruments, but outside of long-duration bonds, the overall asset class remains weak. An intermediate-term uptrend in long-duration U.S. Treasuries will cause the fixed income allocation to shift slightly in that direction, away from short duration, but the average duration of portfolios remains very low.

Inflation-protected bonds continue to fare much better, as might be expected, and thus allocations remain overweight. Conversely, downtrends dominate for international bonds and gold.

Reasons for Gratitude this Thanksgiving

Gratitude does not always come naturally, but like most things, it becomes more fruitful (and easier) the more repetitions you have. As it relates to our own firm, we hope you will oblige us as we mention a few things that stood out to us this year.

First, we are thankful for having a process for making allocation decisions that is impervious to the prevailing news cycle. Although we are 20 or so months into a global pandemic that has caused unprecedented levels of social and economic lockdown in the United States and upended one of the longest-running bull markets in history, the systematic rules we use continue to work by keeping us invested in the strongest segments of the market. There is tremendous peace and comfort in knowing that we don’t have to predict what is going to happen in the future because we have a process that will automatically respond to dynamic market environments.

Similarly, we are thankful for the inherent tax friendliness of a trend-based process. After the run-up in U.S. equity prices, one might assume that a chunk of those gains within a tactical process would incur significant realized gains. Fortunately, that is not the case for Solas Wealth. In fact, most of our continuous accounts have realized very few gains and, in many cases, have harvested net losses that can be used to offset future gains.

Last, and most important, we are thankful for our partnering clients. Our process means nothing without clients who believe in it enough to incorporate it into their portfolios.

We wish our clients the best during the upcoming holiday season. The last couple of years have had some dark moments, but hopefully, we can all think of many things for which we are thankful and try to live each day a little better as we move ahead.


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