Wall Street dealt with several major issues in the first quarter of 2022. Investors had to evaluate the impact of rising inflation, higher interest rates, ongoing coronavirus concerns, and the Russia-Ukraine war. Each of the benchmark indexes listed here lost value by the end of the quarter. However, Treasury yields, the dollar, gold, and crude oil prices ended the first quarter higher. Among the market sectors, energy increased nearly 40.0%, while utilities climbed about 5.0%. The remaining sectors ended the quarter in the red, with consumer services (-12.0%) and information technology (-8.0%) losing the most.

The yield on 10-year Treasuries rose nearly 80 basis points. Crude oil prices increased nearly $28.00 per barrel, or 38.0%, in the first quarter. The dollar gained nearly 2.8%, while gold prices advanced more than 6.0%. The national average price for regular gasoline was $4.231 per gallon on March 28, $0.950 higher than the January 3 price of $3.281 and $1.379 higher than a year ago.

Two lines of Defense in Beacon Portfolios

Over the past month, markets have been rallying on hopes of a ceasefire between Russia and Ukraine, with Moscow pledging to cut back operations near the Ukrainian capital. The stock market’s rebound has come even with interest rates shooting higher as the Federal Reserve stays on track to raise rates throughout the year. The U.S. Treasury yield curve also inverted in the month of March for both 2-to-10 and 5-to-30 year. In this age of divergent markets and economic instability, the necessity for portfolio growth demands a risk-optimized strategy. Beacon portfolios have been designed to not just sustain, but also thrive in these turbulent times. We work to deliver consistent returns despite volatility through a two-pronged approach:

The first line of defense: Strong diversification through equal sector allocation
Traditional portfolio management strategies tend to focus on the pursuit of the latest investment trend or promise capital security through some iteration of asset allocation and diversification. Unfortunately, the reality is that in most cases these approaches fail to optimize risk and maximize portfolio gains over the long term in our increasingly interdependent and uncertain global marketplace.

Strong diversification is the foundation of effective risk management. No one knows which way the market will go, and overexposure or underexposure to any market sector can dramatically impact the overall performance of a portfolio as we have seen in the most recent market bubbles. At Beacon, we believe the portfolio management approach that best meets those needs and allows investments to capitalize on market upsides with protection on the downside is equal sector allocation based on 11 sectors of distribution.

Diversification does not just protect portfolios with regard to risk but also boosts profits when certain sole sectors vastly outperform the market. For instance, last year, when the market started to broaden out beyond technology, sectors like energy and utilities were on a run and significantly boosted our portfolios, providing a buffer to the downside in other sectors. Diversification is about achieving that optimal risk-reward ratio so that regardless of volatility, our investors’ portfolios do well.

The second line of defense: Mechanical stop-loss measures
For the unsystematic risk that cannot be controlled through diversification, Beacon includes mechanical stop-loss triggers in our portfolios, both on equities, as well as on fixed income holdings. With the recent interest rate movements, stop losses were triggered on the fixed income portion of portfolios in March for both Vantage 2.0 and 3.0 portfolios. Similar to how we manage volatility in equity holdings, our portfolios include a similar duration management strategy. Beacon monitors the Vanguard Short-Term Bond ETF (BSV). When it drops 4% from its high, the duration of the bond portfolio is reduced by shifting all holdings to short-term bonds. Just like the equity stop-loss feature, clients’ bond holdings will be restored to their normal allocation once the Vanguard Short-Term Bond ETF (BSV) has rebounded a predetermined amount. The longer it takes the benchmark to reach its bottom, the more confidence we need to add intermediate- and long-term bonds back to the portfolio.

For educational tools to communicate how Beacon is redefining risk, visit the Advisor Toolbox or contact your wholesaler today.

We are excited to announce the addition of our newest team member at Beacon, Niki Sutton, Vice President of Advisor Engagement. She brings years of practice management and marketing experience that drive efficiency and growth for financial advisors. From business strategy and planning to human capital, technology maximization, and mergers and acquisitions, we look forward to having her diverse expertise serving our wholesalers and advisors to help support your future business growth.

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