9 minute read
Just a few weeks ago, DunhamDC took action again, rebalancing itself as markets soared amidst widespread euphoria and greedy sentiment.
· For example, the DunhamDC 60/40 (equity/fixed income) strategy, also known as "DC 60," recently adjusted to a 33/67 allocation, strategically selling into the soaring market heights.
So, in case you aren’t familiar with DunhamDC and why it’s so important, you may now be wondering, “what is all this?”
Well, DunhamDC is an innovative and unemotional investment overlay and algorithm designed to simplify investing in stocks while potentially reducing risks.
Let’s take a closer look at all this. . .
DunhamDC: The Birth of a New Era Using Timeless Wisdom
At its core, DunhamDC is not just another investment strategy; it is a philosophy - one that draws inspiration from the timeless wisdom of two of the greatest minds in investing: Warren Buffett and Benjamin Graham.
Known as the "Oracle of Omaha," Warren Buffett is revered for his sage advice and incredible success in the world of finance.
And Buffett's wisdom was influenced by the insights of Benjamin Graham – who is regarded as the "father of value investing."
Graham illustrated the emotional unpredictability of the stock market through the character of “Mr. Market”.
· Who is Mr. Market? In short, he’s a fictional character who exhibits fluctuating emotions, occasionally becoming overly optimistic and inflating stock values beyond their intrinsic worth. And conversely, he can also become gloomy and fearful, leading to the undervaluation of stocks below their fundamental value. It was Graham’s clever way of highlighting the internal struggle that emotions play in markets.
Therefore, DunhamDC was inspired by Warren Buffett's timeless advice, "Be fearful when others are greedy and greedy when others are fearful,” and aims to leverage the swings in Mr. Market's moods.
Simply put, DunhamDC Buys Fear and Sells Greed.
What Makes DunhamDC Truly Unique
Now, you may be thinking, “Buy Fear and Sell Greed sounds like a good strategy. And it made Buffett arguably the greatest investor of all time. But why then aren’t there many others that do this?”
Well, that’s exactly the point.
Just because something is simple does not mean it’s easy.
Or put another way, telling someone to buy during times of panic and fear is simple. But executing that strategy in the face of falling prices and overwhelming pessimism? That’s certainly not easy.
Conversely, during periods of greed, investors may be told that they should sell some and take money off the table. But again, executing that strategy is difficult when fear of missing out (FOMO) or greed overwhelms rationality.
Yet this is where DunhamDC shines.
By leveraging the insights of Buffett and Graham with the Dykmans Curve - the “DC” in DunhamDC, named after its creator, Ryan J. Dykmans, CFA and CIO of Dunham - DunhamDC can:
· Avoid Emotional Pitfalls – removing the bias of emotions and the irrational investing decisions they feed.
· Help mitigate Sequence Risk - may offer better preservation of retirement income during market downturns.
· Potentially faster Recovery Times – minimizes long-term losses and accelerates post-bear market recovery.
· Reduce Concentration Risk: Diverse portfolio options reduce concentration risk.
Whether it's buying fear during market downturns or selling greed during periods of exuberance, DunhamDC stays steadfast in its commitment to unemotional and disciplined investing principles.
In short, DunhamDC strategically sells stocks as the market climbs and buys during declines – which means that the strategy holds more stocks at market bottoms and less at market peaks.
· Ask yourself: when would you rather hold more equities? At the top where prices are lofty and there are greater downside potential increases? Or at the bottom where prices are cheap relative to fundamental value and offer more upside?
Thus, this approach aims to minimize sequence risk and potentially speed up recovery times, which makes DunhamDC truly distinctive.
For instance, take a look at this actual visualization of the 'DC 60' strategy at work - it strategically and unemotionally sells as prices rise, and buys when prices fall. Therefore, owning less during market peaks and more at market bottoms.
Most importantly, this is the opposite of what most strategies do. . .
Why A Financial Advisor Is Needed More Than Before And How DunhamDC Can Help
In the ever-evolving landscape of finance - where trends come and go and market sentiment shifts like the tides – it’s more important than before for financial advisors to keep their clients protected.
Why?
Well, there are a few reasons – such as:
· The “demographic cliff” ramping up as roughly 10-12,000 ‘baby boomers in the U.S. hit retirement age every single day for the next few years – and is estimated to make up 20% of the U.S. population by 2030. I wrote more on this before if you need more context – read here.
· Americans are living longer – albeit it has leveled off since COVID-19. To put this into context, the average lifespan during the baby boom years (1946-64) was roughly 68 years old. Today, it’s 78. That’s an average increase of a decade retirees must account for with their savings.
· Markets are growing more complex, interconnected, and volatile as the world adapts to new technology – allowing for wild price swings and news to spread around the world very quickly. Gone are the days when global contagion was slow to spread. Now, for example, a bank failing in Europe can hit U.S. or Japanese markets within minutes.
· Investors plagued by emotional biases and cognitive flaws – impacting rational decisions (did you know there are over 150 these biases and flaws that impact decision making?).
These four things individually pose problems.
But combined? It could be a perfect storm.
For instance, with a generational wave of retirees who are living longer than before, they need to make sure their retirement savings and assets will be enough.
Meanwhile, greater market volatility puts them at risk for sudden declines in their portfolios – directly impacting their retirement patterns.
This makes DunhamDC a great overlay for financial advisors to use in order to help their client's financial well-being.
What Are You Waiting For?
It’s not a stretch to say we believe that DunhamDC represents a new era in investing—a paradigm shift that challenges conventional wisdom.
As we embark on this journey together, I invite you to find out more about the DunhamDC portfolios and the way we approach investing in today's dynamic markets.
With DunhamDC, we can potentially navigate the complexities of the financial world with confidence, rationality, and the knowledge that the wisdom of the past will guide us.
Click here or call us at (858) 964 – 0500 to see how DunhamDC can potentially mitigate sequence risk and enhance recovery time.
Also please feel free to visit our Dunham Insights page for more information on the DunhamDC allocations and materials.
Sources:
https://www.cdc.gov/nchs/data-visualization/mortality-trends/index.html
https://gustdebacker.com/cognitive-biases/
DunhamDC Disclosure
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Past performance may not be indicative of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There may be economic times where all investments are unfavorable and depreciate in value.
DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.
Due to the large deviation in equity to fixed income ratio at any given time, investor participating in DunhamDC understands that a large deviation in equity to fixed income ratio can have significant implications for the risk and return profile of the account. Accordingly, during periods of strong market growth the account may underperform accounts that do not have the DunhamDC feature. Conversely, during periods of strong market declines, the account may also be underperforming, as the account continues to decline, due to the higher exposure in equities. Similarly, if the fixed income investments underperform the equity investments, it is possible that the accounts using the DunhamDC feature may underperform accounts that do not have the DunhamDC feature, even though they may have adjusted the exposure to equity investment before a decline. Therefore, the investor must be willing to accept the highest risk tolerance and investment objective the account can range for the selected strategy. Please see the Account Application for the various ranges.
DunhamDC uses an unemotional, objective, systematic approach. The algorithm does not use complex formulas and is designed to create a consistent process with limited assumptions based on historical data.
DunhamDC may make frequent purchases and redemptions at times which may result in a taxable event in the account and may cause undesired tax-related consequences.
Trade signals for DunhamDC are received at the end of each trading day with the implementation of the trades not occurring until the next business day, which means that there is a one-day lag that may result in adverse prices.
DunhamDC operates within predefined parameters and rules, some or all of which may not be available to review. While this approach can reduce emotional biases and enhance consistency, it may limit adaptability to changing market conditions, economic considerations, or unforeseen events. Extreme conditions may require deviations from the program’s prescribed approach, and such adaptability may be challenging to incorporate. The DunhamDC algorithm is programmed based on specific criteria and rules, it may not capture certain qualitative or contextual factors that can impact investment decisions or movement in the markets. Beyond the initial assumptions used to develop the algorithm, it lacks other inputs or considerations that human judgement and discretion may be necessary to evaluate. DunhamDC may utilize historical data, statistical analysis, and predefined rules. It does not make any predictions and may add to certain investments before they perform poorly or may divest from other investments before they perform well. Dunham makes no predictions, representations, or warranties as to the future performance of any account.
Accounts invested in DunhamDC are subject to a quarterly rebalance to its target allocation at the time based on DunhamDC in addition to the signals provided by DunhamDC at any given time.
Dunham makes no representation that the program will meet its intended objective. Market conditions and factors that influence investment outcomes are subject to change, and no program can fully account for all variables and events. The program requires making investment decisions based on factors and conditions that are beyond the Account Owner’s and Dunham’s control.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money.
Asset allocation models are subject to general market risk and risks related to economic conditions.
DunhamDC has a limited track record, with an inception date of November 30, 2022.
**The investment strategy of DunhamDC is powered by the DC algorithm, focusing on the principles of price and time. Utilizing multiple “zones” or trigger points, the algorithm systematically identifies market sentiment,
selling into strength during periods of euphoria and greed, while capitalizing on opportunities duringtimes of pessimism and fear. This allows DunhamDC to adapt dynamically to changing market conditions.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money. Asset allocation models are subject to general market risk and risks related to economic conditions. The chart represents the trade signals when the equity allocation increased (green arrows) or decreased (red arrows) over the period shown. See reverse for Important Disclosures.
1 Market Growth represents the MSCI All Country World Index (ACWI).
The MSCI All Country World Index (ACWI) is a stock index designed to track broad global equity-market performance. Maintained by Morgan Stanley Capital International (MSCI), the index comprises the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.