Portfolio manager says those who've kept a level head in rough times should be well-positioned now to take advantage of attractive valuations.
Kenneth Smith has been spending a lot of time lately trying to make sure that market volatility doesn't send investors into a tailspin.
As a result, the chief investment officer at Seattle-based Empirical Wealth Management says that the high net worth and institutional clients he works with aren't ready to panic yet.
But he credits such realistic expectations not only to this year's educational push, he explains that he has been sounding a similar theme when markets were running strong from 2003 through late last year. The difference, he says, was not to chase short-term performance of soaring asset classes.
Now, conditions are different. But the veteran advisor and portfolio manager says keeping a level head and remaining unemotional in seemingly bearish times is as important as ever. Through good times and bad, he and his co-managers at Empirical emphasize that they've stuck to the same process of monitoring asset class correlations and global market capitalization trends.
And with most segments of equities pummeled this year, Smith believes that investors who've been disciplined about rebalancing their portfolios according to a long-term asset allocation plan can find plenty of good buying opportunities right now.
"The valuations right now in some areas of the market are very reasonable," said Smith. "Earnings could drop and valuations could change. But we're encouraging our long-term-oriented clients, especially the younger ones, to use these current market conditions to raise their stock allocations back to proper levels."
In fact, Smith says he has been scrambling to come up with extra money to put into stock funds for the portfolios of his daughters.
"Even for investors with shorter investment horizons, conditions right now offer a good buying opportunity in stocks," he said. "We're not telling older investors closer to retirement to go overboard and load up on stock funds. But unless their circumstances and goals have changed, we think it's a good time for people to rebalance portfolios at attractive valuations."
The firm's average allocation for his 500-plus clients is around 60% equities right now, says Smith. He prefers exchange-traded funds and passively managed portfolios from Dimensional Fund Advisors. A typical investor at Empirical might have 35% in U.S. large-cap funds. That's down from about 45% a few years ago.
In large-blend categories, Smith likes the Vanguard Large Cap ETF (NYSEArca: VV). He also tilts to the DFA U.S. Large Cap Value Fund (DFLVX).
The advisor targets another 20% to U.S. small-cap funds, which is relatively consistent with allocations of past years. That's divided across micro-caps, small-cap blend funds and small-cap value funds. Smith uses the iShares Russell Microcap Index (NYSEArca: IWC) and the Vanguard Small Cap Value ETF (NYSEARca: VBR) to fill those shoes. Smith also likes to include the Vanguard Small Cap ETF (NYSEArca: VB) and the DFA U.S. Small Cap Fund (DFSTX).
Some 25% of client stock assets now go into developed international markets. "In 2003, it started at around 16% and gradually has been bumped up," said Smith.
He uses four different funds in those areas. One of this is the Vanguard Europe Pacific ETF (NYSEArca: VEA) for large-blend international markets. The advisement firm mixes that with the DFA International Value Fund (DFIVX). For exposure to smaller foreign stocks, it's implementing in portfolios the DFA International Small Company Fund (DFISX) and the DFA International Small Cap Value Fund (DISVX).
In emerging markets, Smith will add about 10% of a typical client's stock assets into the DFA Emerging Markets Core Equity Fund (DFCEX). He also likes the Vanguard Emerging Markets Stock ETF (NYSEArca: VWO) for some portfolios.