Take Action to Make Portfolios Walk the Talk

Whenever I appear in the media, be it electronic or print, I answer the questions posed by the interviewer from the wellspring of research that I conduct every hour of every working day. I pontificate with the best of them. I am, in effect, talking the talk.

However, having a point of view regarding the economy and markets -- however sound, articulate, and well thought out -- is the start, not the end point, for investment decision-making.

An investor must turn this point of view into actionable steps in the form of portfolio decisions that result in market-beating rates of return. Walking the talk.

In my experience, walking the talk is the single most difficult aspect of managing one’s assets as many elements of portfolio management make generating alpha (outperforming the market) on a consistent basis an under-appreciated dynamic of successful investing.

Allow me to illustrate one dimension of what I’m referring to -- what to do when you believe an unfavorable sector shows signs of short-term out-performance -- with the following example:

Suppose you’re an investor who’s managing your assets for the long term. As a longer-term investor, you’ve concluded that your portfolio should be underweight Financials for various long-term (secular) reasons. (Note that this example could easily be applied to the asset allocation decision -- how much should I allocate to stocks?)

At some point, however, market circumstances have brought you to the conclusion that, in the relatively short term, Financials appear likely to do better than the overall market. Financials will outperform for a while.

Perhaps Financials’ short-term strength is due to positive news or because the stocks in the sector have reached an extremely low valuation level (making them highly attractive) or because a change of perception, however temporary, has set in among investors. Whatever the reason, your forecast that Financials will do well over the short-term, in your view, has a high probability of being correct.

What should your appropriate investment decision be? Should you have raised the weighting to even, or perhaps overweight, in a sector that you dislike for the longer-term?