Q1 2022 was a quarter of extremes – for investors, households and, without overstatement, the world at large. More than ever, investors are wondering how their portfolios should be structured going forward.
Questions about managing interest rate risk and protecting your portfolio against inflation are part of a long list of concerns many investors face today. While all these issues are important, when thinking about how concerned you should be about your portfolio, the first step is to measure and understand the beta of your overall portfolio. Unfortunately, for clients without a great deal of market experience, talking about beta can be a difficult conversation.
Put simply, beta measures the volatility of a stock in comparison to the overall market. A beta over 1 suggests a stocks price moves a lot more than the overall market up or down. The opposite applies to stocks with a beta less than 1. Of course, when it comes to a specific company, the true long-term risk of an investment in that company comes down to the fundamentals of that company’s business. But over the shorter-term during period of market stress beta is a good estimate of your market exposure.
Our goal at the Foster Family Office group is to apply this beta measure to the entire portfolio. As we have discussed in previous commentaries, our goal is to avoid large market losses at all costs. For long term growth we believe this is critical. Not all investors think this way. For those that are interested in taking concentrated positions in speculative securities, they are obviously willing to entertain significant losses to potentially make outsized gains. But Family Office portfolios are for clients that have decided that they are already wealthy enough, and it’s more important that they don’t ever become unwealthy. And key to never becoming unwealthy is avoiding large losses.
The past quarter has vindicated this process. By way of example, we have set up the Family Office Growth Portfolio to have a beta of 0.5 or lower. That is, we have specifically designed the portfolio so that if the broader market is down 20%, we want our portfolio to be down no more than 10%.
So far, mission accomplished. For Q1 2022, certainly an ugly quarter by recent standards, our Growth Portfolio was down only 1.4%, outperforming our benchmark, the MSCI World ETF, by 3.9%, which dropped 5.3% over the three-month period.[i]
All this said, back to the investor worries that have raised their ugly heads over the quarter. We continue to be cautiously bullish on equities. It’s our view that goods-inflation will moderate in upcoming months as supply chains become unlocked and Covid restrictions moderate. This will provide a respite from talk of sharp rate rises from central bankers, which should give us stronger markets in the second half of the year. 2023 is another matter, but let’s worry about that when we get there. Stay the course!
[i] The iShares MSCI World ETF is an exchange-traded fun incorporated in the USA. The ETF seeks to track the performance results of the MSCI World Index. The Foster Family Office Growth Portfolio performance is based on our model account that targets a 25% allocation to Global ETFs, a 25% allocation to Enhanced Income securities, 45% to Alternative Investments, and 5% to Inflation Hedges.
