At the heart of the way we manage portfolios there are two qualities – discipline, and flexibility. On the surface, those two ideas may seem at odds with each other, but they’re really not. As the bear market between 2000 and 2002 taught most investors, the definition of ‘discipline’ can change quickly when your stocks are falling. While better investor discipline would have not prevented the three-year slide, it would have prompted investors to get out of their stock holdings for the majority of the market’s decline. But, somewhat stunned that the market turned weak so quickly, too many decided to stay in and ride it out, certain that things would improve soon. Things didn’t improve though, and it wasn’t unusual to hear of some portfolios losing more than half of their value by the time stocks finally hit a bottom in October of 2002. Bluegrass Portfolio Management applies the proper type of required discipline to avoid those disasters in our managed accounts.
‘Flexibility’ is the other key. Again the most recent bear market will illustrate how this is so. While it may have seemed that every single stock was sinking by the middle of 2000, that wasn’t quite the case. Many industries we’re just starting a terrific rally, such as healthcare providers and water utilities. However, investors stuck with their tech stocks, sure that the glory days of the late 90’s would materialize in the tech sector again during the new millennium. Those investors who were flexible enough to leave one sector and look for leadership in other sectors would have fared very well – the water utilities industry gained as much as the NASDAQ Composite lost during the bear market.
But the need for flexibility doesn’t end there, since there is no one single solution to investing success. Sometimes fundamental analysis yields great results, and sometimes technical analysis is the best option. There are periods where it pays to choose individual stocks, and there are other periods when it makes much more sense to own mutual funds. By being able to utilize different techniques and ideas, Bluegrass Portfolio Management is not trapped by just one style or approach.
In fact, our flexibility is evident right down to the instruments we choose to trade. Our core holdings are individual stocks, since that’s where most of the opportunities are. We also build a foundation for our portfolios with a small group of high quality mutual funds. By using the two in conjunction, we can find that ‘optimal’ mix between long-term and short-term points of view. You’ll also find exchange-traded-funds in our portfolios, when we want the flexibility of a stock but the automatic diversity of a traditional mutual fund. For some of our clients, we even maintain bond portfolios. And finally, for our clients who are properly authorized, we can use equity and index options to enhance returns as well as hedge existing positions.
When executed properly, this discipline with flexibility is the difference between mediocrity and excellence.
But what about our style? What sort of strategies do we use, and what can a client expect to see in their accounts? Our biases are as follows:
1) Value over growth
2) Small caps represent a significant portion of our holdings
3) Index and inverse index mutual funds
5) No short selling
6) Sector biases
Be sure to read about our specific approach, and the types of holdings we use.
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