Post Sell-off Update on the Vegan Growth Portfolio

It has certainly been a wild three weeks after a peak to trough -11.8% decline in the S&P 500.

As we’ve been saying in our blog, during January we were trying to factor in the effect of emerging strength in the VXX along with rising interest rates due to a weak bond market. If you add to this a parabolic move in US equities, I felt that stocks could sell off sharply, which they did.

For our clients (which is reflected in our model portfolio), we sold off approximately 40% of our equity holdings and added a 10% “hedge” by buying the emerging VXX to offset potential stock market losses should the decline occur. The downside to adding a suitable hedge to a portfolio is: should the market continue to rise any gains would be relatively muted or non-existent. I consider that a small price to pay to reduce potential risk and volatility.

To quote super investor Paul Tudor Jones: “The most important rule of trading is to play great defense, not offense.”

Client portfolios held their value and the Vegan Growth Portfolio model shows a positive gain for the year of 12.5% (net of all fees and expenses) versus 1.5% for the S&P 500.

A good advisor or investment manager should be paying attention to the many moving parts that could affect their client portfolios. In this instance, we were able to successfully anticipate the sell-off. That won’t always be the case and sometimes we’ll be wrong as well. I think it’s critically important for the long term success of our clients to act when we think the odds are good that we’re entering a high risk period.

Socially Responsible Investing, Vegan Growth Portfolio

Socially Responsible Investing, Vegan Growth Portfolio



Brad Pappas
President, RMHI

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results.

8 tough questions to ask your potential investment advisor

During my career I’ve been interviewed several hundred times by potential clients.  In almost every case during the interview the prospective client runs out of questions very quickly.  Investors just don’t know what to ask.   You can find many good questions with the aid of a Google search and every advisor will be able to answer them.   But what about questions that could separate the good from the exceptional?

It would not be an exaggeration to state that skill and knowledge of your investment advisor can have a significant impact on your future.   Ideally what you’re looking for is someone who can guide your assets smoothly in good times.  Then, not be surprised and unprepared during the bad times.  You’re not looking for perfection as it doesn’t exist.

Take most sales pitches with a grain of salt, the interviewee may sound convincing but how do you really know?  You have to ask the right questions and below are a few that should help your process.

These questions are really designed to be directed to professionals who actually manage client assets such as RIA’s or portfolio managers. If you’re interviewing a Financial Planner  they may not be able to answer one or more.  FP’s are commonly generalists and defer client assets to products such as mutual funds, insurance or Exchange Traded Funds so they may not have the necessary expertise.

  1. Are you a fee based advisor or do you work on commission?” Commission-based advisors or brokers may not follow your investments performance as compared to a fee-based advisor.  In general, they’re salespeople who represent a brokerage firm. Fee-based advisors should work to protect your assets in down markets and grow them in good times, since their fees are based on total assets under management.
  2. Of the assets you have under management are they mostly allocated to mutual funds, ETF’s (Exchange Traded Funds) or individual stocks or bonds?” If the advisor answers mutual funds, ETF’s or the basket approach used by FolioInvesting or any other Robo (Betterment) the odds are very high that the advisor is a generalist.  Generalists are not prepared to get granular regarding your portfolio.  Maybe you believe single digit long term returns are fine.  But if you’re looking for long term returns in excess of 10% or more you’ll need an advisor with talent and expertise.Not every active portfolio manager will beat the major indices even though it’s really not that hard to do. Just don’t assume they all do well, most don’t. The good ones can answer the questions below and why wouldn’t you want a good one?
  3. Assuming you’re looking for an advisor familiar with Socially Responsible Investing: “Tell me your philosophy about socially screening a potential investment?” At some point the advisor should ask what your boundaries are or how pragmatic you can be.  Be advised that the only way to be sure you have a diversified portfolio that is free of objectionable investments is via individual stocks and bonds.  With individual securities you’ll have input. 
  4. Once you’ve screened out the objectionable investments: “Please tell me how you select companies that pass the screen into a portfolio?”  Or, “Do you have an investment style that you can tell me about?” Advisors who use individual stocks should have a proven method or algorithm to select their client investments.  Without a systematic approach the returns will be more luck than skill and you’ll probably be better off with an Index fund.  Beware of the advisor who tells you their system is extensively back-tested.   Extensive back-testing leads to curve fitting or confirmation bias.  These heavily tested systems will likely fail in the future.   The best systems are relatively “loose” and have some discretionary room for the advisors experience and judgement.
  5. Ok, I’ll admit this next question is a “gotcha question” but every good advisor should be able to answer this one correctly:  “Is the position size of a new position in portfolio based on a % of account assets or volatility?” Position weight should always be based on volatility.  The most volatile investments should have the lowest % allocated to them.  For more information on position sizing see Van Tharp.
  6. The classic: “Can you demonstrate a long term track record?” The SEC and state regulators frequently frown upon stating track records under the assumption that all returns by advisors are random.  Managers and styles can run hot and cold but the best ones learn to adapt and evolve.  If they can produce a track record ask if the use of margin or leverage was employed in the portfolio.   Margin or leverage can increase the rate of return but it comes with exponentially rising risk.
  7. Every great investor or advisor has an insatiable curiosity and is a reader.  We always want to improve which will be reflected in our client accounts.  Ask “What is the last good book or white paper you’ve read regarding investing and what did you learn from it?”  
  8. This is a simple question but it’s also the most revealing and the important on this list. Most advisors or financial planners fail their clients regarding long term risk.  They fail their clients by either lack of knowledge or failure to understand risk. “How will you protect my assets during the next recession?” It’s been 9 years since the last major recession induced bear market.  That means many advisors have never actually experienced a bear market with client assets under management. If the planner or advisor tells you that bear markets can’t be predicted or you get a disorganized word salad then reject the advisor.  Learn to understand what an Inverted Yield Curve is.  Otherwise be prepared to lose 35% or more of your portfolio some point down the road.   Remember the law of numbers: If you lose 35% of your portfolio it will take a 50% return to break even again and that takes years.

Taking profits in SGOC

We are taking the profit in shares of SGOC after the stock erupted for another 35%+ gain this morning.   Stocks that go parabolic usually become very unstable when profit taking eventually takes over and we’d like to be out of the stock before that begins to happen.   As you can see by the chart it has made similar leaps before but it usually gives up about half the gain in short order.


No positions

Brad Pappas