We held a good deal of exposure to some of the industry's most-maligned asset classes six months ago: REITs (Vanguard REIT Index ETF (VNQ)) up 16% year to date; MLPs (JPMorgan Alerian MLP Index ETN (AMJ)), up 12% year to date, and long-dated bonds (iShares 20+ Year Treasury Bond Index ETF (TLT)), up 13% year to date.
While this may sound a bit self-congratulatory, it's really not meant to be. This is merely a qualitative case study about how our behavior and decision-making is affected by our own relative performance.
Ok, that's great, so what are you doing now?
You are starting to hear even the most bullish of investment professionals struggling to find good values here. Very few subsets of the U.S. equity market look inexpensive right now. We like to look at potential upside versus downside when making buy/sell decisions -- how much upside is there for U.S. stocks from here in the near term? My answer, "Not enough to be buying them."
Of course this is a bit of a sweeping generalization because some sectors and individual names still look appealing. But generally speaking, we're happy with what the stock market has given us over the past few years.
We've been discussing a more defensive posture for the past three months, and we have practiced what we've preached in client portfolios. The result has been a little counterintuitive -- further outperformance. Yes, the stock market has continued to grind higher. But so have our portfolios made up primarily of master limited partnerships, Treasuries, international and emerging market stocks, and real estate.
Defense wins championships.
Until we see a correction of some magnitude (at least 5%-10%) we are not particularly interested in adding U.S. equity exposure. In the meantime, I like the idea of maintaining a defensive, income-oriented stance: Continuing to lock in profits from last year as they convert to long-term capital gains -- whenever possible -- and keeping a nice cash cushion a-la Scrooge McDuck.
At the time of publication the author owned AMJ, IWM, TLT, VNQ, and VWO in client accounts.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.