Client Letter: Investment Strategy Update

On Monday, in response to several disconcerting data points, I reallocated my client’s portfolios to a more defensive allocation. Here is the letter I sent to my clients outlining the reasons why I made such a move:

Dear Clients,

In response to the high valuations of the U.S. stock market and the longer-maturity bond market, the current Bull Oak portfolio has entered into a defensive allocation. When one invests, it is to strive for price appreciation. However, after a 6-year bull market rally, investors are hoping that the markets continue their upward momentum. To put it bluntly, many investors are aggressively searching for yield and returns while hoping to NOT lose money. This should not be the reason why one invests. In today’s environment, it is more prudent to be cautious rather than aggressive. While we are all long-term investors, we can be smart about our money and not invest with a blind eye. The primary reasons why I decided to enter into this defensive allocation:

  • Within the past 6-10 weeks, stocks and bonds have become highly correlated
  • This is highly unusual as they are usually inversely correlated. I believe this is in anticipation of a FOMC interest rate decision
  • U.S. stock valuations are at very high levels: S&P 500 12-month P/E ratio is at 20.51
  • Global bonds are expensive: 10-yr U.S. treasury 2.28%; 10-yr German Bund: 0.72% (recently 0.05%!)
  • China’s economy (2nd largest in the world) is slowing down
  • Concerns of Greece exiting the Eurozone
  • The FOMC (Federal Open Market Committee) is likely to raise rates within 6-12 months, placing downward pressure on both stocks and longer-maturity bonds
  • Both stock and bond markets are expected to tread water, with serious downside risk. I do not see many positive catalysts in the near future
  • Year-to-date, the U.S. markets have proven to be lackluster. This has been a sideways market with no real gain to the upside. Currently, the ETF indices YTD price returns are as follows:
    • SPY: S&P 500 (stock index): 2.18%
    • AGG: US Aggregate Bond (bond index): -0.50%
    • DBC: GSCI Commodity Index: -0.54%

Despite the many potential catalysts to the downside, many investors are very hungry for “yield” and high returns. Many of these investors have flocked to High Yield Bonds, growth stocks, and alternative markets (e.g. venture capital, private partnerships, etc.). This has kept the markets afloat for the short term, though I dare not be a lemming and chase returns. Many of these investments are purely speculative at best. As Warren Buffet has famously stated: “Be fearful when others are greedy and be greedy when others are fearful.”

In today’s marketplace, I believe the wise decision is take some money “off the table” and to wait for a more attractive environment. The Bull Oak portfolio is positioned to weather a rising interest rate environment. It is also designed to weather disappointing economic news and other bearish events. While I cannot control the markets, I can control how and when which markets to participate in. If I am incorrect, the worst that can happen is that the Bull Oak portfolio misses some upside movement. However, if I am correct, the Bull Oak portfolios will fare much better than the rest of the market, saving my clients much pain and anguish. Keep in mind that I am not predicting a complete market fallout (e.g. the 2008 financial crisis). Many of the leading indicators suggest that the U.S. economy is not suffering from strain. However, I do believe that the U.S. markets have come too far, too fast. A ~10-20% stock market correction is not out of the question.

Once valuations are more reasonable and downside risk is mitigated, I plan to revert the portfolios to a more “normal” state.

If you have any questions or concerns, please do not hesitate to call or email me. Thank you for allowing me to serve you. I truly feel lucky to provide you with my service.


Ryan A. Hughes
Founder & Portfolio Manager
Bull Oak Capital



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While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein. This information is intended only for the recipient of this email. Under no circumstances should this report be shared with or forwarded to anyone else without the express permission of Bull Oak.