Note from the CIO: Abacus Trading Team, Creative & Nimble

When the Covid-19 crisis gained momentum, we reminded our clients of the advantage they have — as long-term, goal-focused, planning-driven investors — for managing this (and any) crisis. As information grew, we sent out our game plan for rational decision-making during uncertainty. Finally, to top off the quarter, we conducted a town hall in collaboration with Dimensional Fund Advisors. Today, I would like to focus specifically on what we can control in the portfolios we manage. And this is where my heroes, the Abacus Trading team, enter the picture. Their role is often the least recognized since they do not interact directly with clients, but they are critically important to the entire team.

Trading Portfolios During Increased Market Volatility

Since mid-February we’ve experienced jolting stock market movements on an almost daily basis.

If we consider daily market movements over the last 30 years (January 1990 through December 2019), the daily stock market movement — as measured by the S&P 500 Index — exceeded 3% (up or down) only once every 50 days or so (2% of the time). In contrast, if we look at the past five weeks (starting Feb 20th), daily market movement has exceeded 3% on 16 of 25 trading days, or 64% of the time — over 30 times the historical average!  

This increase in volatility has driven an increase in our trading activity on behalf of clients. In the past five weeks, Abacus has executed seven times more trades than this time last year. 

Every Abacus client has an Investment Policy Statement (IPS) that defines the portfolio’s weighting between equities and fixed income, which ties to expected levels of risk and return over time.

Cash Management

 Abacus monitors accounts daily to ensure adequate cash is available for upcoming withdrawals and then invests excess cash and new deposits in accordance with the portfolio’s IPS. When the crisis first broke out, there was a fair amount of concern among clients and market participants about the stability of bonds in general, and those in our portfolio in particular. Indeed, half of our bonds dropped in value over the first weeks of the Covid-19 crisis. Our Investment Committee was able to identify the other half that had held their value, providing an excellent source of liquidity for client withdrawal needs. Meanwhile, the bonds that had dropped in value are now mostly recovered.


 Rebalancing occurs when the allocation between stocks and bonds becomes meaningfully different than the target asset allocation. When the stock market rises more than the bond market, stocks become overweight relative to their target allocation. In these situations, we trim stocks and reinvest the proceeds into fixed income to move the portfolio closer to its target asset allocation. Conversely, when the stock market declines more than the bond market, as we’ve seen recently, the fixed income (bond) portion of the portfolio becomes overweight. In this case, we sell a portion of the fixed income and add the proceeds to stocks. This disciplined approach forces us to buy stocks at relatively lower prices and to sell stocks at elevated prices. Contrast this method with the “buy high, sell low” approach many investors unknowingly employ, particularly when driven by their emotions or social/peer pressure. 

When rebalancing, we make every effort to do so in a tax-efficient manner. Selling stocks in taxable accounts may result in capital gains tax liability. Sometimes this is unavoidable — we will not allow taxes to hijack our investment discipline — but we can often reduce or eliminate the tax hit by looking for offsetting losses (see #3 below), rebalancing in tax-deferred retirement accounts such as IRAs, or employing charitable giving strategies.

Part of our risk management strategy for managing through a crisis is to hold enough in bonds so our clients can take comfort they’ll almost never be forced to sell stocks during a downturn. This allows us to ride out the crisis with peace of mind that the drops will only be temporary, unrealized losses rather than permanent, realized losses. At the same time, during a significant drop in stock prices, we want to rebalance (as described above) by selling some bonds and buying more shares of stock at relatively low prices. We want to assure you that rebalancing is not at odds with the risk management strategy of holding enough bonds to ride out the crisis. Our Investment Committee has simulated a crash more extreme than the 2008 Financial Crisis, which demonstrates that continuous, methodical rebalancing throughout the downturn results in a speedier recovery without a material compromise in the financial security afforded by bonds.

Tax-Loss Harvesting

 Within a taxable account, when the value of an investment falls below the purchase price, there is an unrealized loss. In such situations, we evaluate whether to “harvest” or realize the loss by selling the security. If we decide to move forward, we sell the position and realize the loss. We then use the sale proceeds to purchase new investments to maintain the target allocation. 

You may ask, “Why is it a good idea to lock in a loss?” When a security with an unrealized loss is sold, it creates a realized capital loss. Realized capital losses can be used to offset up to $3,000 of ordinary income each year, and to offset any amount of realized capital gains from the sale of appreciated investments at any time in the future. We always replace the sold asset with a comparable asset, so that if you’re selling ‘low,’ you’re also buying ‘low.’

Hopefully this helps you understand recent trades you may have seen in your portfolio. We know this is a turbulent and stressful time, and greatly appreciate the deep trust you have placed in us. If you have any further questions, please feel free to contact your Abacus Advisor directly. 


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