You know how little things can create major pain? In December, I broke my middle finger playing hockey. On the scale of illness and injury, mallet finger is a trivial annoyance. It hardly merits discussion. It’s a scratch, a nit, a bother.
But my seemingly inconsequential finger break has caused the rest of my hand, body and mind to develop a whole list of ailments, throwing me for a loop. Such is the effect of a simple change on a complex system. As in English folklore, it was the want of nail that lost the kingdom.
Because my middle finger doesn’t bend as it did, I can’t make a fist. I drop everything that I pick up. I’ve become a nine fingered typist and a one handed slouch. Because I couldn’t hold a racquet or a stick, I stopped competing in sports. I’ve gained a little weight, again, which I’ve now resolved to lose, again. And the dog is annoyed that I don’t throw the tennis ball and I’m annoyed at the dog. You get the picture.
When we have to confront the unfamiliar, we are thrown out of rhythm. We may become depleted of energy, which can lead to poor decision making. We can all find examples in our own lives of bad decisions made while tired, impaired or in pain. How we think and act in times of stress, tiredness, grief or pain may be very different than when we are well, happy, rested and calm.
There are important investment and economic implications of this insight. Financial advisors counsel us not to make life-altering decisions when confronted with sudden, stunning loss; for example, after the death of a spouse or loved one. It is easy to make a bad call, and even easier to let someone we trust take control over decisions.
Because our mental energies have been sapped, we don’t think clearly. Too often we act erratically and make poor choices. If we decide to make an investment decision while in this state of mind, we may make one that is not in our best long term financial interest. This is when having a trusted financial advisor can help you the most. A trained advisor can recognize your state of mind and give you better counsel.
In investing, this can mean not over-reacting to loss of principal, staying the course towards your financial goals. It is even better for our portfolio and state of mind if the advisor follows a stable and disciplined process. A well designed sequence will mitigate the effects of emotional reaction to recent events. This is one of the major reasons that institutional investors prefer managers who have a proven track record and a disciplined and consistent process.
This month, again, we rely on our framework, discipline and process to keep us from getting too high or too low when reacting to financial headlines. In spite of our discomfort, or perhaps because of it, we remain true to the method, trusting in our dedication to achieving long term success. US political rhetoric notwithstanding, markets ignored the imminent impact of the sequester in February and, for the most part, retained or improved their year-to-date returns.
The U.S. equity market, as measured by the S&P 500 total return index, increased 1.4% for the month and 6.6% since January 1. European risk appeared to increase with the unpleasant news of negative growth in the fourth quarter of 2012 and a “disastrous” election result in Italy, which renewed fears of the breakup of the Euro.
Meanwhile, the Japanese Prime Minister Shinzo Abe continued to push for a weaker yen in order to jumpstart the Japanese export market. International Developed Markets lost 1.0% for the month but are up 4.3% for the year to date through February 28, as measured by the MSCI EAFE Index.
Brazil, India, China and Russia, fared poorly in February on slowing growth expectations and the Emerging Markets Index lost most its year-to-date gains, losing 1.3% for February while staying modestly positive (0.1%) for the year-to-date.
In the fixed income markets, fears of increased interest rates waned temporarily and the BarCap U.S. Aggregate Bond index increased 0.5% for February, but remained down 0.2% for the year-to-date. Longer duration bonds won back some January losses. Gold was a poor performer in February, losing 4.6% for the month and 4.5% for the year. All returns are through February 28, 2013.
The information below reflects our composite portfolio performance for the month ended February 28, 2013. Returns do not include investment management fees.
The Island Light Global ETF Conservative Portfolio was up 0.2% in February and is up 0.7% for the year to date with a beta since inception of 0.23 relative to the Russell 10001 and a current yield of 2.1%. Its index grew 0.3% for the month and is up 0.8% for the year.
The Island Light Global ETF Income Portfolio was up 0.1% in February and is up 1.3% for the year with a beta of 0.45 relative to the Russell 10001 and a current yield of 2.2%. Its index grew 0.4% for the month and is up 1.8% for the year.
The Island Light Global ETF Balanced Portfolio grew 0.1% in February and is up 2.4% for the year with a beta since inception of 0.67 relative to the Russell 10001 and a current yield of 2.2%. Its index grew 0.3% for the month and is up 2.9% for the year.
The Island Light Global ETF Growth Portfolio was flat for February and is up 2.7% for the year in with a beta since inception of 0.84 relative to the Russell 10001 and a current yield of 2.2%. Its index grew 0.2% for the month of February and is up 3.6% for the year.
The Island Light Global ETF Aggressive Portfolio was off 0.1% for February and is up 3.2% for the beta since inception of 0.96 relative to the Russell 10001 and a current yield of 2.1%. Its index grew 0.2% for the month and is up 4.4% for the year.
We measure our portfolios against an index of US fixed income investments (the BarCap Govt/Credit Index2) and an equal-weighted index of Large US Stocks (Russell 10001 value) and non-US stocks (MSCI ACWI ex US3).
Our goal is portfolios that are allocated to participate in up markets while also remaining diversified in assets designed to reduce the likelihood of investment loss when markets go down. Island Light’s investment concept embodies a process called Enlightened Investing. The goal is a stable approach to portfolio management, emphasizing quantitative principles and proven investment practices, while accentuating asset allocation as the most important determinant of long term success in investment planning. This tested method is designed for the long term investor.
While Enlightened Investing may not protect your fragile digits from every hammer that the markets will throw at you, it can help keep your financial position from spiraling out of control. Island Light can be the nail holding your investment horseshoe firmly in place. Surely, as in hockey, over the long term, your goals will follow.
1The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. it includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values. The Russell 1000 Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.
2The Barclays Capital Long Government/Credit Index measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities longer than 10 years. The average maturity is approximately 20 years.
3A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets.
The investments discussed are held in client accounts as of March 1, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
