The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
A Disciple of Discipline
08/29/2012 10:00 am EST
A disciplined asset allocation strategy can help investors buy low and sell high, says Michael J. Cuggino, president and portfolio manager at Permanent Portfolio Family of Funds.
Asset allocation is an important part of a disciplined strategy with your portfolio. My guest today is Michael Cugguno to talk about that. So Michael, first of all, when you say a disciplined strategy and asset allocation together, what do you mean?
Well, two points. Asset allocation is asset allocation. We use a number of different asset classes in our strategy-gold, silver, stocks, bonds, US and non-US, natural resources, commodities, etc. So a broadly diversified multi-asset class structure.
And then the discipline aspect of that is that we maintain a very disciplined approach toward being an asset allocation fund-the rebalancing, the not letting your winners run too much or your losers get too low before you rebalance kind of thing.
I mean, asset allocation funds are structurally flawed in the sense that you can't let your winners run. You have to sell and rebalance, and if you don't, then you become a little bit more speculative and you are not really an asset allocation fund anymore. So we pay attention to those sorts of things.
And I guess having a disciplined strategy would keep you from chasing the hot sector at all those times, right?
That's exactly what it does. As an investor, you're happy to hear that, because it acts as a control on your portfolio-management team, so that they can't make a bet and be wrong, because they have got to be pulled back and reallocated. You know, it forces you to buy low and sell high to some degree, even if the manager doesn't necessarily want to do that.
Now, you lose sometimes by doing that, because sometimes the winners do continue to run, but by and large it is a structural way to buy low and sell high. And I think that does provide an inherent advantage to investors in a conservative strategy like ours.
And how often should this rebalancing take place? How often do you look at it?
Well, that varies depending on the objectives and the portfolios. In our case, there is no set limit or time frame for rebalancing; we are constantly assessing the portfolio and making adjustments as we see necessary. But you could do it weekly, daily, hourly, monthly, quarterly, you know. From our perspective we think a diligent and continuous review is the right way to go.
And return-wise, based on everybody wants to beat the market by as much as they can, beat the S&P, is there kind of a ballpark figure I should be looking for when I'm looking for a management team or a manager?
It depends on what your objective is. I mean, if you are a stock fund, sure, you want to beat the S&P 500 or some stock index. If you are something else, then that is really kind of irrelevant.
In our case, our investment objective is the preservation of capital over the long term or that preservation of purchasing power; you may be adding low-risk growth or as much growth as we can on top of that. So for us, I wouldn't call it a benchmark, but ensuring that we are beating some approximation of inflation is appropriate.
And then we typically will provide a secondary index like the S&P 500 to show how we are doing versus a pure growth or an equity index. So it's kind of a combined approach.
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