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I visualized my grief if the stock market went way up and I wasn’t in it…or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” —Harry Markowitz

Q2 Review—

The investment world lost a great one in June when Nobel Prize winner Harry Markowitz passed away. He was a legend in investing circles for his work on risk and diversification and for developing the Modern Portfolio Theory for portfolio optimization used across the industry.

Given his experience, you’d think he’d use his knowledge to optimize his own portfolio mathematically. His math drives the movement of trillions in assets, but as quoted above, with his own money, he leaned into British economist John Maynard Keynes’ “I’d rather be roughly right than precisely wrong.”

Speaking of roughly right, thank goodness we follow a process based on preparation, not prediction. The first half of 2023 hasn’t exactly followed a historical blueprint; here are a few examples:

  • Central bankers continued to lift lending (and thus, mortgage) rates, yet homebuilders have been among the year’s best sectors.
  • A handful of regional banks imploded due to poorly matched assets and liabilities. The stocks and bonds of these banks were wiped out, but bank deposits and account holders were spared due to government intervention.
  • Commodity prices collapsed shortly after Goldman Sachs predicted 40% returns in 2023, driven by tight supplies.

These all point to the folly of investing based on forecasts, no matter the brilliance of the logic. We’re trying to match client needs with a set of investments most likely to meet those needs within a comfort level that can lead to long-term success. Markowitz was brilliant, but perhaps his greatest insight was understanding the human element and uncertainty driving investments.

Recent Portfolio Decisions— 

Investment changes in the calendar quarter, as well as early July, included all of the following:

  • We cut some of our explicit value exposure in May, selling the Vanguard U.S. Value Factor fund (ticker: VFVA), buying more broad market exposure, and buying the Vanguard Total Stock Market ETF (ticker: VTI). We felt this was prudent as we saw benefits to more core allocation as inflation fell.
  • As the 3rd quarter began, we continued trimming back the other non-core equity exposures. This was done through sales of the Horizon Kinetics Inflation Beneficiaries ETF (ticker: INFL) and JPMorgan Equity Premium Income (ticker: JEPI). We also pared back some exposure in the iShares Core Dividend Growth ETF (ticker: DGRO), Aptus Collared Investment Opportunity ETF (ticker: ACIO), and the SPDR S&P 600 Small Cap Value ETF (ticker: SLYV). These proceeds were directed towards more core equity exposure in the Vanguard Total Stock Market ETF (ticker VTI) and the SPDR S&P 500 ETF (ticker: SPLG). Despite these trades, we still maintain a bias towards small caps, though smaller now, all the while lowering the portfolio’s expenses overall.
  • On the defensive side of portfolios, we took advantage of the run-up in interest rates and added some longer-duration exposure. This was done by selling the Schwab Short-Term U.S. Treasury ETF (ticker: SCHO) and purchasing the iShares Core Total USD Bond ETF (ticker: IUSB).

We’re continuing to manage portfolio exposures with careful consideration of risk and return. We have more action plans prepared for the quarter and patiently monitor conditions that might favor you, our clients, and our friends. Keep an eye out as we make these changes throughout the quarter.

Market Risks and Our Outlook—

The biggest market debate is whether the economy will have a soft landing or a full-on recession. The rise in rates impacts both investor preferences (5% T-bills?!) and business and consumer financing. It’s no easy task to go through a rate hike cycle, especially one this harsh, and come out of it without economic damage. A good snapshot of the past 60 years is here:

Source: Apollo as of June 2023

What happens if the expected soft landing turns into something more problematic? That is where we’d expect our defensive sleeve to shine, countering some of the effects of a hit to the growth sleeve. That zig/zag is at the heart of Markowitz’s approach, both in theory AND practice.

That said, we take some comfort in the differences between the global financial crisis and the current state of the world. While governments have taken on debt, consumers don’t carry the outrageous debt they held in 2007:

Data as of March 2023

On top of that, significant infrastructure investments are underway, hopefully offsetting some of the weakness that’s sure to come as higher rates work their way through the economy.

Source: Carson as of May 2023

While the tailwind of rising profit margins may not be what it was… we’re somewhat comforted by the history of markets like the one we’re going through now:

Bottom line, there are positives and negatives to consider … taking an objective approach to all of them is the best way to stay balanced and ready to pursue new opportunities as they emerge.


One side effect of Corporate America’s focus on profit margins is that money has been shoveled into those with the best metrics. While that makes sense for a time, it can also lead to distorted pricing between the winners (higher margins) and losers (lower margins).

This is a trend that has persisted and may continue to. Still, as risk-aware allocators, we continue to monitor the valuation divide that has opened between large growth companies and their smaller, less expensive counterparts. This is one analysis, but “small value” is clearly priced significantly below its historical valuation.

And overall, stocks have more competition than they’ve had in 20 years, as bond yields have lifted and equity dividend yields have fallen:

Source: Oakmark as of June 2023

So, we’re keeping a watchful eye on market underpinnings and will likely take additional actions in the second half of the year with an eye toward risk-adjusted return potential.



COMPASS ION ADVISORS, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Conshohocken, PA. Registration does not imply a certain level of skill or training. For more information about our firm or to receive a copy of our disclosure Form ADV and Privacy Policy, call (610) 228-2200 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. 

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The S&P 500 Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large-cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.  

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