The Active Asset Allocation Portfolio utilizes a trend following strategy by buying and selling securities based on established price trends in each asset class. Below is a snapshot of the current trends we are following:
The bright spot in the world economy, US Equities have been one of the few asset classes that has been doing well this year. Almost everything else is flat or down. Dark clouds continue to loom in the distance for the US Equities like they have for most of the year. During each of our last updates this year, we have highlighted potential “speed bumps” stemming from issues/indecision from the Federal Reserve or the Federal Government. Fiscal cliff, bond tapering, government shutdown and now a possible default have all captured our attention and the headlines. The markets rally when there is clarity (either good or bad outcomes), but slowly decline as issues and problems drag on. This kind of response has been happening for over a year and will likely continue in the future.
Trailing behind the US Equities are Foreign Equities. They have not been taking the indecision from the Fed or Federal Government as well as the US Equities. The charts show the Foreign Equities slightly more volatile than US Equities. Of course there are sub asset classes that have been doing better than others. We are watching Emerging Markets as a possible investment opportunity.
Bonds have been a minor holding in our portfolio for most of the year. Almost across the board, we have been lightening up on bonds. With the Fed announcing that the economy may be able to come off life support and can taper its bond buying program, it is reducing the value of existing bonds.
How does that work again? With the Fed buying less bonds there will be more supply than demand for bonds. That will result in bond issuers having to compete for a more limited number of buyers. They will do this by making their bonds more attractive – raising interest rates. New, more attractive bonds will make the existing bonds less valuable.
Ultimately, interest rates going up are a good thing for investors. The process of getting there is difficult.
US Real Estate has been tracking closely with bonds – and for the same reasons. Foreign Real Estate has been performing better and could be an opportunity to invest if the positive trends continue.
Our holdings at this time are minimal.