Defensive Investing: The New 60/40 Portfolio

John Fisher, President & Chief Investment Officer, and Mark Yestrau, Senior VP, Client Portfolio Manager, address the uncertainty in the markets, the current trade war, tariffs, and what Bridgeport is doing to protect our clients’ portfolios.

If there is one thing that the market does not like, it’s uncertainty. Today we’ll be discussing what we’re recommending our clients do during these times and perhaps more importantly, what Bridgeport has done prior to this trade war in terms of building portfolios. Inevitably, there are going to be things that come to roil the markets. Nobody knows when, and nobody knows to what degree.

How does Bridgeport practice defensive investing in preparation for these types of macroeconomic events?

While it’s hard to predict what sort of macroeconomic events are going to occur, inevitably something occurs. We wouldn’t have predicted that there would have been a pandemic five years ago or that there would be a trade war going on with our closest trading partner in the United States and that we’d be talking about tariffs. I don’t think you would have found a lot of people out there who could have predicted that.

There’s always something. So it’s important that you have a proper lead position and portfolio before these events occur, even though they’re hard to predict and how they’ll impact your portfolios. You want to be properly positioned and diversified by owning high-quality assets. When you’re properly diversified across different types of asset classes as well as within each of those asset classes, you’re spreading out your risk as to how that event will impact your portfolio.

If you’re too concentrated in any one asset class or a subsegment within that asset class, whether it’s a specific industry, or a split, or a specific geography, you can be caught off guard, resulting in an unusually large loss that can be difficult to recover from. It’s important to be properly diversified by owning high-quality, cash flow-producing assets, so that you are properly positioned and able to weather the storm when these events take us by surprise.

How are privately traded assets designed to weather volatile market conditions?

A key part of Bridgeport’s strategy for our clients is to mix publicly traded assets (stocks and bonds) with privately held assets such as private equity ownership of private companies, private lending and other income-producing strategies, private real estate, and infrastructure. The benefit of combining the publicly traded assets and privately traded assets is that you significantly reduce overall portfolio volatility and portfolio losses during times of stock market volatility. We’ve seen this in the past with our portfolios in 2022 and other market downturns. Again, it goes back to that level of diversification where if you can limit losses during bad periods and spread out your risk, it becomes much easier to stay invested over the long term.

With a properly diversified portfolio, even if publicly traded assets are down, other parts of the portfolio, such as fixed income or privately traded assets, can still generate positive returns. This is one of the key elements to earning strong rates of return over a long period of time.

Why do we advise against clients going to cash when markets are down?

It’s an understandable temptation that when there’s stock market volatility, one should just go to cash and take a risk off the table. The problem is that the stock market is so fast-moving that often by the time you’re thinking about exiting, there’s already some degree of loss that you’ve incurred. Even if you are able to limit temporary losses by cashing out, you won’t know when to get back in.

It’s a difficult game to attempt to time the market. If anything, it’s probably easier to time the exit from the market than it is to time your reentry into the market. And if you miss that reentry point, you can miss a potential upswing. When you’re constantly getting out of the market and trying to get back in at the right time, that will result in lower long-term rates of return. There are very few people that have been able to successfully do that.

At Bridgeport, we feel a diversified portfolio makes it easier for clients to stay the course during market volatility. As always, feel free to contact us if you have any questions.