Steve Hammers is taking advantage of tough times to buy into the massive selling going on in markets now.
At the same time, the Nashville, Tenn.-based portfolio manager's putting together a note to clients of his firm warning against panicking and trying to time markets.
Isn't that contradictory?
"It all starts with how you're allocated. If you've got a good long-term plan, then there's no need to time markets," said Hammers, who serves as chief investment officer at Compass Advisory Group, which oversees about $3 billion in assets for advisors and institutions around the country.
But he's a firm believer in rebalancing. And that's what Compass is doing now for clients.
"There have been many studies over the years showing that market timing is hazardous to your financial health," Hammers said. "We're not willing to take the risk of moving in and out of markets based on how we think markets will move. If we're wrong, we've just killed a good, longer-term return our clients might've been able to gain."
Hammers doesn't rebalance annually or quarterly. "Markets don't care whether it's Jan. 1 or June 30," he said. "You should only rebalance when your portfolio gets out of balance, not when the calendar tells you to."
Compass sets bands to rebalance around 13 different asset classes used in portfolios. Each client portfolio is set at a specific allocation to each. If any of those numbers move up or down by more than 20% from the original target allocation percentage, then a rebalancing will take place.
So for example, if large-cap U.S. stocks have a 20% weighting of an overall portfolio, then it can go as high as 24% or as low as 16%. "That's a deviation of plus or minus 20% of the target allocation," Hammers said. "So you take whatever target in each asset class you've set and multiply it by 20% to get the bands."
The last time he rebalanced was in October 2007 when commodities soared. Currently, Hammers is selling bonds and putting that money into stocks.
"People are rushing to bonds and inflating prices now," he said. "They're pulling money out of stocks. We're doing just the opposite."
Hammers has been managing these types of portfolios for 14 years. He also has experience as an asset allocation specialist for institutions at Merrill Lynch. Part of those responsibilities included helping firms review and search for money managers.
"What that experience really showed me was that creating a good asset allocation plan is more important than any decision on picking a money manager," Hammers said. "Indexing gives you a higher probability of success. And ETFs improve those odds due to their lower costs and tax efficiencies."
He uses strictly exchange-traded funds in client portfolios. Right now, Hammers is buying the PowerShares Preferred Portfolio (AMEX: PGX). It follows a Merrill Lynch index of investment-grade preferred stocks. "PGX invests in debt instruments with ratings. But they act like a separate asset class with a relatively low correlation to stocks and bonds," Hammers said.