We want to be more invested in markets when cyclical risk is low, and conversely, less exposed when high. Our strategy rarely leads us to be completely out of risk assets (like stocks), but we actively manage (raise or lower) each client’s exposure in order to maximize long term appreciation while mitigating losses. Continually monitoring the fundamental relationship between markets and the economy helps us determine when the cost of risk is higher than the associated returns.
The equity markets have historically been more volatile, and over long periods of time, have produced higher returns than bonds. However, there have been significant periods when the relative returns of equities compared to bonds was poor. Therefore, recognizing that equities can be both more volatile and produce poor returns in some environments, we believe it is necessary to study both history and economics in order to minimize risk.