The CIO Brief: Don’t Time. Trim.
People want things to be binary, but life is a spectrum.
Investing would be simple if we could just rotate back and forth from 100% exposure to 0% exposure. All-in when values are cheap, all-out when things get expensive.
Unfortunately, nobody can time the market with any real consistency.
Even if they could, the ongoing capital gains taxes would erode much of the benefit.
But…if you were dead set on trying.
I think you’d have a decent argument to dump your tech stocks and “head to the beach” for a bit.
Ok, so the market is rich.
Does that mean we are A) in an AI bubble and B) bubble go pop?
No idea and nope.
The market is maddening in this way. Markets can stay expensive for years. Or longer.
Maybe this time is different.
Maybe this is a new paradigm.
Maybe these are dangerous words and these mega cap tech firms are grossly overspending on AI infrastructure?
Who knows.
Anybody that tells you with confidence that all this unprecedented cap-ex spend on Blackwell chips and data centers will 100% have a high ROE is fooling themselves. It’s an arms race and we have a storied history of overspending on the hard capital needed for revolutionary tech.
It sort of feels like a coin flip.
What we do know is most of the Mag 7 are far better businesses than the average S&P holding over the last 100 years. Plus, today’s valuations are being supported the constant bid from passive ETF flows (that could care less what valuations are).
In other words, irrational and unstoppable are two entirely different things.
However, if your portfolio is 100% the S&P, you are very long just a handful of mega tech firms.
And those Magnificent 7 stocks have been responsible for ~50% of the total markets returns the last four years.
Nvidia is approaching a tenth of the index on its own and is more valuable than the combined public markets of several developed nations. This isn’t anti-Nvidia. It just highlights how concentrated the public markets have become.
So what’s the alternative?
White knuckle the volatility and hope the music keeps playing.
Try to ping-pong between total exposure and zero exposure.
Thankfully, there is a 3rd option.
You don’t have to sell everything. You don’t even have to decide if the market is expensive.
You can just trim.
If your target portfolio allocation is 60 percent stocks and it drifted to 80 percent, that extra twenty percent is no longer a reward for being right. It’s concentration risk well outside of your investment plan.
Rebalancing is what endowments and the largest family offices do. They don’t chase heat. They harvest it.
And while the US large cap looks expensive, other pieces of the puzzle are not. Small caps are priced near recession territory and real estate (left for dead by many investors) also screens cheap on a relative basis.
We’re not trying to make a heroic call on small caps. But we do think real estate is interesting in spots.
Regardless, the larger point is: you don’t want a portfolio that only works if US large caps stay hot.
Rebalancing doesn’t mean selling stocks and sitting in cash. It means redirecting gains into areas that are priced for forward returns rather than past performance.
That’s what professional allocators have done for decades while the rest of the market piles into the same handful of mega cap names.
That doesn’t require a prediction. It just accepts that the next decade may look different than the last.
So instead of timing, we trim. We add other non-correlated asset classes including private investments and rebalance as needed.
That is how you stay invested without being reckless. That is how you compound without pretending you have a crystal ball.
Best,
Brad
PS - If your stock exposure has drifted way above target or you feel stuck because you have millions in embedded gains, reach out.
We can walk through alternative investment options that manage taxes and help rebalance to a diversified portfolio.
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