Having been around the block a few times regarding portfolio construction and rebalancing, I have had my share of mistakes, missteps and misguided assumptions. It turns out that what makes sense in textbooks and academia does not always apply “In the Moment(um)”.

Here in lies a major frustration for investors (and me). Textbook investing and “In the Moment(um)[i]” investing both have their place and time, it’s just not the same place and time. My Lesson: While patience is a virtue, one must evolve or be left behind. Hear me out.

Experience, The Now, and an Evolved Recognition

Experience

I started investing in the 90s, when tech was the rage. You could buy the hottest stocks in the morning, and you made money before lunch (clearly I was all in on “In the Moment(um)” Investing). 12%-15% annual returns were considered low. My dormmate's father challenged me on my investment assumptions. What did he know, I was an 18-year-old biology major, sure I knew more about investing than this seasoned “old” investor, then younger than I am now (46). The tech bubble blows up, stocks lose about half their value, (the downside of “In the Moment(um) investing)” in 2000 as I drop out of Veterinary school to transition from personal investor (and I use “investor” lightly, more like kid speculator) over to professional investor. I start to study investing rather than the stock message boards. I rapidly go all in on textbook investing, reading every investment book I can get my hands on and grinding my way to the CFA Charter., leaving In The Moment(um) investing behind. Textbook diversification investing works, until it doesn’t. Things that make you go hmmm[ii]…90s reference in there?

The Now

Check out this end of February returns table below. Most notably the S&P 500 Momentum[iii] Index Total Return Factor. This is one measure of “In the Moment(um)” investing. It is diversification investing’s worst nightmare. And thus becomes a Grown-up Dane Wealth Manager’s nightmare (but clearly the friend to my younger 18 year old self). To be sure we typically always have “some” (arguably a lot) “In the Moment(um)” investments in client portfolios, but since “In the Moment(um)” investments are the extreme example of all-or-nothing investing, if we are not all in, we never seem to have enough in the portfolio. This leads to a potential short-term dissatisfaction and our rebalancing paradox:

While “In the Moment(um)” investing is working, it becomes an ever bigger part of the portfolio, never big enough on the return side of things, but always too big (and getting bigger) from the textbook diversification side of things.

As an an example (there are many others), two charts below, while presented differently and on different stock indexes, make the fundamental case that small cap stocks are at or near record relative undervaluation's to large cap stocks. As such becoming a smaller and smaller part of a un-rebalanced portfolio. Diversification investors would say small caps then might potentially be a good place to put some of your In The Moment(um) winning proceeds. However, it most likely will be wrong in the short run.

So in a diversified portfolio when “In the Moment(um)” stocks are all the rage, you never have enough, and to compound the challenge, you have Mr. Diversification, telling you to sell what is winning to buy what is currently losing, it is mind-numbingly frustrating and challenging.

Evolved Recognition

So what is a wealth manager to do. Well, we believe a good wealth manager communicates as to the challenge of this paradox and helps to guide their investors through with an evolved recognition that both diversification and “In the Moment(um)” investing are right (and thus I need to be a blend of 18 year old Dane and 46 year old Dane). At Members’ Wealth, for some investors, we may lean into the moment and stay around a while longer, for others, we may leave the momentum party early. Regardless, it is certainly investor dependent. One thing is for sure, you just have be sure that you have the right amount of each so that you can try to be successful when each is wrong…Now that should really make you go Hmmm.

[i] “In the Moment(um), otherwise known as momentum investing is an investment strategy that involves buying securities that have had high returns over a certain period and selling those that have had poor returns over the same period. The central premise of momentum investing is that assets which have performed well in the past will continue to perform well in the near future, and conversely, assets that have performed poorly will continue to perform poorly. This strategy is based on the notion of "momentum" in the financial markets, where the price of an asset moves in a particular direction for an extended period due to various factors including market sentiment, investor psychology, and broad economic trends.

[ii] The phrase "Things That Make You Go Hmmmm..." is famously associated with a song by C+C Music Factory, a dance music group active in the early 1990s. Released in 1991 as a single from their album "Gonna Make You Sweat," the song features a catchy beat and spoken word verses that discuss various puzzling situations, particularly in relationships, that are indeed "things that make you go hmmmm."

The chorus of the song uses the phrase "things that make you go hmmmm" to highlight moments of doubt or suspicion, often related to romantic infidelity or deceptive appearances. It was a significant hit at the time, reflecting the group's ability to blend dance music with pop sensibilities and humor, contributing to its widespread appeal. The song's catchy hook and its relatable lyrics about the complexities and oddities of human behavior made it a memorable track of the early '90s dance music scene.

[iii] The S&P 500 Momentum Factor refers to a specific investment strategy or index that targets stocks within the S&P 500 universe showing strong momentum characteristics. Momentum, in financial terms, is the tendency of securities to continue moving in the same direction—upward or downward—over a certain period. The S&P 500 Momentum Factor focuses on capturing the performance of stocks within the S&P 500 that have the highest momentum scores, based on their recent performance relative to other stocks in the index

The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. There is no duty to update this information. Illustrations provided are for presentation purposes only. Actual investment experience will vary with stock selection and changing market conditions. Investment advisory services offered through Member's Wealth, LLC, a registered investment advisor. The Dow Jones Industrial Average (DJIA) is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The National Association of Securities Dealers Automated Quotations (NASDAQ) is an American stock market that handles electronic securities trading around the world. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Bloomberg US Aggregate Bond Index, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

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