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Does Your Portfolio Have A Margin Of Safety?

By Ronald Delegge Building an architecturally sound investment portfolio doesn’t happen by chance. A structurally strong and healthy portfolio is organized into three basic parts: 1) the portfolio’s core, 2) the portfolio’s non-core, and 3) the portfolio’s “margin of safety.” All portfolio parts complement each other by deliberating holding non-overlapping assets. Let’s talk about the part of the portfolio that represents the “margin of safety.” The concept “margin of safety” was originally developed in the 1930s by Benjamin Graham and David Dodd, the founders of value investing. Their idea was applied to selecting individual stocks at undervalued prices to help people become better investors. In the context of the individual investor, the “margin of safety” represents the capital or money that a person absolutely cannot afford to risk to potential market losses. Like an insurance premium, this money gets set aside from a person’s core and non-core portfolio to be invested in fixed accounts with principal protection and liquidity. (click to enlarge) Some people have deceived themselves into believing their investments require no margin of safety. This group generally believes they are too wealthy, too experienced, and too smart to have a margin of safety inside their portfolio. Ironically, this same group of people that invest without a margin of safety (or insurance), have insurance (or margin of safety) on their automobile, home, health, and life. Why is there an illogical disconnect between the need to protect physical assets, while simultaneously ignoring the financial ones? “I’m a long-term investor” or “the stock market always bounces back” are common excuses for investing without a margin of safety. Unfortunately, both of these techniques are not a credible form of portfolio risk management. Diligent and proper risk control is always proactive versus being passive or reactive. Others may claim that investing in bonds or physical assets like gold is their portfolio’s margin of safety. This too is erroneous. Why? Because bonds and precious metals are subject to daily fluctuations just like stocks and can lose market value. Gold’s almost 40% loss in value since mid-2011 is a tough lesson on why you shouldn’t use assets that are prone to market losses as a form of portfolio insurance. Similarly, those who have invested in long-term treasuries as a form of portfolio insurance have suffered losses near 8% over the past three-months alone! When is the best time to implement your portfolio’s margin of safety? Like insurance coverage, the prudent investor acquires a margin of safety within their investment portfolio before they need it. Put another way, the timing of when you implement your portfolio’s margin of safety is mission critical. Think about it this way: Would it be logical to attempt to buy insurance coverage after you’ve already had an automobile accident or after your home has been destroyed? Of course not! Similarly, would it be logical to implement a margin of safety after your portfolio has suffered catastrophic losses? Of course not! To be fully protected, you must prepare ahead. In summary, implementing your portfolio’s margin of safety should happen when market conditions are favorable, not when it’s raining cannonballs. And if you’re caught in the unfortunate situation where you failed to implement a margin of safety during good times and market conditions have deteriorated, the next most logical moment to implement your margin of safety is immediately. Disclosure: No positions Link to the original article on ETFguide.com

Meritage Partners With Behringer For Distribution Of The Insignia Macro Fund

By DailyAlts Staff The strategic agreement between Behringer Securities and Meritage Capital is starting to bear fruit. Back in May, the two firms announced an agreement to develop, manage, and distribute specialized, multi-strategy investment funds intended to address the challenges presented by market volatility. On July 20, Behringer formally announced that it will be distributing the Insignia Macro Fund (MUTF: IGMFX ), an open-end mutual fund managed by Meritage. The Insignia Macro Fund initially debuted on December 31, 2013. It employs global-macro investment strategies in pursuit of attractive long-term risk-adjusted returns. The multi-manager fund is unique among global macro mutual-fund offerings in that it allocates to “discretionary focused managers.” Per the fund’s most recent fact sheet date 4/30/15, the $64 million fund employed seven underlying managers in the following weights: 16.53% – H2O Asset Management Discretionary Macro | Fundamental 15.85% – Willowbridge Associates Discretionary Macro | Fundamental 14.91% – The Cambridge Strategy Quantitative | Fundamental & Technical Models 14.80% – QMS Capital Management Quantitative | Fundamental & Technical Models 14.77% – Tlaloc Capital Discretionary Macro | Fundamental 13.92% – Crabel Capital Management Quantitative | Short Term 9.22% – Blackwater Capital Management Trend Follower | Pattern Recognition “Historically, global macro strategies have shown higher long-term returns with lower volatility than developed equity markets – and little correlation to stocks, bonds or other investments,” said Meritage CEO Alex Smith, in a recent statement. “We are pleased that the Fund will be distributed on Behringer Securities’ platform, and we look forward to our continued partnership.” In the same statement, Behringer CEO Frank Muller said the addition of the Insignia Macro Fund to Behringer’s platform indicates Behringer’s commitment to providing financial advisors with access to “nimble, entrepreneurial managers, strategies and structures to build better portfolios.” He also said the fund helps investors “identify portfolio diversifiers” and preserve their wealth. The past year has been both hot and cold for global macro funds, and the Insignia Macro Fund is no exception. Its A-class shares returned 9.31% for the year ending June 30, ranking in the top 42% of the funds in its Morningstar category (Managed Futures). But for the final six months of that period, the fund returned just 0.66% – and yet, this was enough for it to rank in the top 24% of the category. The Insignia Macro Fund is also available in institutional-class shares (MUTF: IGMLX ). Class A shares have a net-expense ratio of 2.00%, while the institutional shares carry fees of 1.75%. The minimum initial investment for the A shares is $2,500; while the minimum for institutional shares is 100 times higher, at $250,000. For more information, visit insigniafunds.com .

An Alternative Way To View Diversification

We’re living in a post 2008-2009 financial crisis world. Investors and advisors alike know that having your eggs all in one basket could land you in some hot water (especially if it’s the arguably broken 60/40 portfolio). The reason being, one single person or group isn’t able to call what’s going to be the “best” asset class (by performance only) in any given year. Enter the ever so popular diversification quilt , which essentially ranks each asset class top to bottom over the past 15 years. The issue, of course, is that although they include 10 asset classes, they really don’t include alternative investments, specifically Managed Futures. The latest to release a chart like this is Business Insider. As you might remember, we took the liberty of changing around the “quilts” published by Bloomberg back in September by adding Managed Futures to the mix. The second issue with the quilt table is that these “quilts” are all on the same axis level. For example, if an investment was the worst performer of the year and still up 2 or 3 percent, it would look the same as an investment that came in last at a -10% on a different year. Which got us thinking how different would the table look if we spread out the investments so that the performance range would be visible? This is what we got. P.S – Looking at each asset class on its own fluctuates year to year, is just one way to look at volatility. So, so we connected the dots of the largest performance range (Emerging Markets), Managed Futures, and the smallest performance range (Cash). (click to enlarge) (Past performance is not necessarily indicative of future results) Source: Large Cap = S&P 500 Small Cap = Russell 2000 Intl Stocks = MSCI EAFE Emerging Markets = MSCI Emerging Markets REIT = FTSE NAREIT All Equity Index HG Bond = Barclay’s U.S. Aggregate Bond Index HY Bond =BoAML US High Yield Master II Cash= 3 Month T Bill Rate AA = Asset Allocation Portfolio (15% Large Cap, 15% Intl Stocks, 10% Small Cap, 10% Emerging Markets, 10% REIT, 40% HG Bond Share this article with a colleague