The information below is a sample of what we send to our clients monthly
September 2020 SMI Private Client
Sample Strategy Update
Dear fellow investor,
The stock market roared higher in August, driving strong performance across the full range of Private Client portfolios. SMI’s equity-focused strategies turned in particularly strong gains, with Stock Upgrading outperforming the market with a gain of +9% and Sector Rotation posting a stunning +18.6% return. Bonds, which have had a great year overall in 2020, finally took a breather in August, retreating a bit. But even there, Bond Upgrading was able to limit losses significantly. Overall, August was a great month for PC investors. Here’s the breakdown.
Dynamic Asset Allocation
There was one change to DAA for September. The recommended categories/ETFs are:
  • Gold — GLD
  • U.S. Stocks — SPY
  • Foreign Stocks – EFA
Change for September:
  • Sold BLV (Bonds)
  • Bought EFA (Foreign Stocks)
This month we reversed DAA’s end-of-January trade, when we exited Foreign Stocks in favor of Long- Term Bonds. That was a great move: long-term bonds were arguably the best place to ride out the bear market while foreign stocks got hit hard. Even after the extended rebound from the lows, BLV gained +8.1% from where we bought it at the end of January, while EFA fell -2.4%.
Of course, the picture changes as we move to the more recent past, which is why we made this change for September. Looking back at just August’s performance, Foreign Stocks were up +4.7%. More importantly, long-term bonds fell -4.1% as interest rates turned modestly higher. Last week's speech by Fed Chairman Jerome Powell was widely interpreted as a significant change, indicating that the Fed is willing to let longer-term interest rates rise as they pursue a goal of higher inflation. Long-term yields did, in fact, move higher in response (which pushes prices on those bonds lower).
I'm not convinced that long-term rates are heading much higher in the near-term, as it seems likely that softer economic recovery data coming in over the next several months will keep a lid on rising yields. But the key aspects of the recent change in bond yields as they pertain to DAA are:
1. The trend in foreign stocks has strengthened sufficiently in recent months to overtake the weakening momentum of long-term bonds;
2. There's a structural story in the market now that is supportive of higher long-term yields, which would be bad for long-term bond values.
From DAA's perspective, this month’s change is 100% about the first of those two factors — the momentum scores say it's time to make the switch. But it is interesting that the second factor triggered last week, just days before DAA reversed this trade from eight months ago. Swapping these two asset classes worked out well then, and we hope it will be similarly beneficial this time around.
A few notes on gold
Gold finally took a breather after its red-hot ascent in recent months, finishing August with a slight -0.3% drop. For context, gold gained +10.8% in July, and was up another +13.1% from April through June. Put those together and gold had gained over +25% in the four months leading up to August. That’s unsustainable and not healthy for a long-term bull market. Healthy bull markets include pullbacks and corrections, which is what we consider August's price action in gold to have been.
Gold has been an incredible holding for DAA investors since it was added at the end of January. We believe it remains strongly positioned to succeed in the current financial/political environment, characterized as it is by massive Federal Government stimulus and the recent Fed pivot toward openly ignoring inflation in commodities and other tangible assets.
In August, we used the weakness in gold to shift a small portion of Private Client gold positions out of GLD and into two gold mining company indexes. Gold mining companies went through a brutal bear market from 2011-2018, which significantly streamlined their operations, cleaned up their balance sheets, and has most miners still trading at incredibly attractive valuations despite significant gains from their lows. Low energy prices, which are a major component in mining costs, mean that the profit margins of miners have exploded higher along with the rising gold price.
Given the extremely bright big picture set up for gold and the current strength of the gold miners, we believe the risk/reward tradeoff is tilted strongly in favor of shifting a small portion of our gold holdings to the miners.
Stock Upgrading
There were no changes to the Stock Upgrading portfolio for September.
While Upgrading obviously missed out on some gains by staying partially in cash as long as it did, one benefit we’re seeing is that Upgrading is now invested in the strongest funds. That was evident in August as the portfolio raced to a +9% gain, well ahead of the +7.2% increase in the S&P 500 and the +6.5% return on a blended index (just-the-Basics) portfolio.
Sector Rotation
There was no change to Sector Rotation for September.
"When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational." – George Soros
Many SMI investors may consider old George to be on the naughty list for his political views, but he is one of the most successful hedge fund managers of all time. That makes his quote from 2009 interesting as we witness what could be a bubble in tech stocks inflating.
This has clear implications for Sector Rotation, which profited from another huge month of gains in tech this month. SR's official recommendation, Ark Innovation ETF (ARKK), was up a blistering +18.6% in August.
This is thrilling, and scary, at the same time. When we rotated into ARKK a month ago, I noted the back- tested experience of SR in 1999, which was the last period of comparable tech frenzy. You may remember that tech bubble ended in tears in a brutal -80% selloff from 2000-2002. But before getting to that selloff, SR would have booked by far its most successful trade ever. Even after giving back nearly a third of its value in the two months before SR pivoted out, that final tech trade would have gained +250%!
So while we're nervous about how and when this ends, we're also riding the momentum wave for now, knowing these episodes can extend longer than most people expect. Needless to say, risk management is crucial here, which is why SR is a limited allocation in most PC portfolios.
Bond Upgrading
There was no change to the Bond Upgrading lineup for September. Bond Investing 101 states that when bond yields rise, their prices fall. That’s what happened in August as yields finally bumped higher. This was a bigger deal for bonds of longer duration, the type we owned in DAA. At the shorter end of the spectrum, losses were relatively mild, and for Bond Upgrading they were milder still. While Vanguard’s Total Bond Market Fund slid -0.9% and the Bloomberg Barclays Aggregate Bond Index dropped -0.8%, Bond Upgrading was off just -0.15%. Better upside performance and downside protection is a good combination, explaining why Bond Upgrading leads the Aggregate Index by a +8.9% to +6.9% margin through the first eight months of 2020.
The rotation within our blended Private Client portfolios in August was another great illustration of why we coach investors to view their portfolios holistically rather than focusing on the performance of each specific component. DAA and Bond Upgrading, which have co-starred through most of 2020 with year- to-date gains of +13.1% and +8.9% respectively, finally took a step back this month. But right on schedule, Stock Upgrading and Sector Rotation surged forward, keeping the overall trend of our portfolios moving higher.
We appreciate each of you and the opportunity you’ve given us to walk alongside you on this investing journey. Please let us know if you have any questions or if there’s any way we can be of assistance.
Mark Biller
Senior Portfolio Manager

Mark Biller

Mark Biller is co-founder of SMI Advisory Services and serves as Senior Portfolio Manager of SMI Private Client and the SMI Funds. As Senior Portfolio Manager, Mark has ultimate decision-making authority regarding all portfolio decisions and trading practices. In addition to his duties at the Advisor, Mark has been the Executive Editor of the Sound Mind Investing newsletter for over 20 years. Mark’s financial writings have been featured in a variety of national print and electronic media, and he also appears as a financial commentator for various national and local radio programs. Mark has a B.S. in Finance from Oral Roberts University.

Professional Management

  • Accounts proactively managed by a team of Chartered Financial Analysts (CFAs).
  • Portfolios implement the Sound Mind Investing strategies.
  • Regular rebalancing across all managed accounts.
  • Asset Location — Strategies allocated across different account types to improve tax efficiency.
  • Tax Loss Harvesting — In taxable accounts, the intentional realization of losses in some positions to offset gains in others, deferring your tax liability and enabling gains to compound longer.
  • Wash Sale Monitoring — Track and monitor trades across managed accounts to help mitigate costly wash sale issues.
  • Asset Protection Guarantee — If you lose cash or securities from your account due to unauthorized activity, Charles Schwab will reimburse you for the amount lost.

Stewardship Focus

  • A focus on SMI stewardship principles.
  • SMI Private Client is a fiduciary, meaning we are obligated to put client interests ahead of our own.
  • Extensive experience with QCDs, donating appreciated assets, and utilizing donor advised funds to help your giving go further.
  • Continuity of portfolio management in the event of Death, Disability, or Impairment, including helping surviving spouse:
  • Reregister account titles
  • Claim step-up basis on taxable accounts
  • Update beneficiaries
  • Invest based on new risk tolerance
  • Privacy and security policies safeguard your personal and financial information.
  • Our team monitors your accounts and assists with contribution and distribution requests.
  • Asset Protection Guarantee — If you lose cash or securities from your account due to unauthorized activity, Charles Schwab will reimburse you for the amount lost.

Personalized Portfolios

  • Assessment of your risk capacity and risk tolerance.
  • Proposed portfolio based on your risk assessment.
  • A customized portfolio to fit your specific preferences.
  • Clients investing at least $250,000 work one-on-one with a dedicated Stewardship Advisor.

Client Portal

  • View your investment holdings, returns, and financial plan all in one place.
  • Monitor portfolio performance by SMI strategy, by account, and by security.
  • Access Charles Schwab statements and tax documents.
  • Track account activity, including contributions and distributions.
  • Schedule services, including contributions and distributions, personal information and beneficiary updates, and opening of new accounts.

Transparent Cost

  • Simple annual management cost of 0.85% for Premier, 0.95% for Select, and 1.00% for Classic clients.
  • Accounts are billed at the end of each month (in arrears) based on the average balance for the month.
  • Utilizes institutional funds with lower costs when available.
  • Advisory and fund costs below industry averages.
  • SMI Private Client covers all trading commissions.*

* Although SMI Private Client covers all Charles Schwab commissions, SEC Fees will still apply, as will short-term redemption fees, if applicable. Health Savings Accounts may not receive free trades, since they are opened by third party administrators.

Tax Return Analysis & Strategies

  • We use a powerful analytical tool to review your tax return and suggest strategies to improve tax efficiency. We look at ordinary income and capital gain tax brackets, deductions, Medicare premium brackets, and credit phase-out ranges. To view a sample, click here .
  • We can model multi-year tax scenarios to view the effects of advanced tax strategies, including:
  • Roth Conversions - Converting money from tax-deferred IRAs to Roth IRAs during lower earning years can reduce the total tax liability over an investor’s lifetime.
  • Tax Gain Harvesting – Selling securities with long-term capital gains to fill up the 0% tax bracket.
  • Donation of Appreciated Securities – Identifying appreciated long-term securities that may be donated directly to charities or to Donor Advised Funds, allowing a tax deduction of the full market value and avoiding taxes on the capital gains.
  • Aggregating Charitable Deductions – Consolidating multiple years worth of charitable giving into a single year, and claiming the standard deduction in other years, can increase total tax deductions over time. Donor Advised Funds and donations of appreciated securities may be used in this aggregation process.

Client Dashboard

  • View your investment holdings, returns, and financial plan all in one place.
  • Monitor portfolio performance by SMI strategy, by account, and by security.
  • Access Charles Schwab statements and tax documents.
  • Track account activity, including contributions and distributions.
  • Schedule services, including contributions and distributions, personal information and beneficiary updates, and opening of new accounts.
  • Using the SMI Private Client Mobile App, clients can check balances and transactions, track performance, monitor financial plans, view statements and tax forms, and contact us.

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SMI Strategies

ENHANCED STOCK UPGRADING: The Power of Stock Momentum

Stock Upgrading is a strategy based on the observable phenomenon that recent performance tends to persist. This strategy uses Individual Stocks, Mutual Funds and ETFs (collectively, "Securities"). The strategy may invest in US Large-Cap Securities, US Small-Cap Securities, International Securities and/or commodities, depending on Stock Upgrading's current assessment of the momentum within each group. Securities are held as long as they demonstrate superior leadership among their peers. Each month the strategy re-assesses the current holdings and replaces lagging Securities with new leaders.


Enhanced DAA (EDAA) is a strategy designed to participate in bull market gains, while striving to reduce losses during bear markets. EDAA owns a variety of ETFs drawn from six broad asset classes. EDAA measures trend/momentum to dynamically shift the portfolio weightings assigned to each potential holding. Broadly speaking, EDAA will always allocate among a variety of stock, bond, and alternative holdings, but the weightings between the specific holdings will vary according to market conditions and their impact on each potential investment vehicle's trend. DAA is an all-weather strategy that has generated impressive back-tested results, in large part via its ability to play good defense during bear markets.

SECTOR ROTATION: High Risk, High Reward

This strategy invests in a small number (normally 5, but up to 10) of stock funds and ETFs focused on specific sectors, like technology or financial services, demonstrating strong recent momentum. It’s a high-risk/high volatility strategy. While its peaks have been higher and its valleys lower than SMI’s other strategies, Sector Rotation has generated impressive long-term returns. The strategy is intended to comprise only a modest portion of your stock allocation.

JUST-THE-BASICS: Simple Excellence

Using index funds, we spread your allocation across the global stock market. Just-the-Basics is designed to match the performance of the market in a tax-efficient manner, so it is well-suited for use in taxable accounts.

BOND UPGRADING: The Power of Bond Momentum

We include bonds to provide safety and stability. This strategy combines a bond index fund base with rotating bond funds that vary in duration, credit rating, and type. Bond Upgrading evaluates its holdings each month and replaces lagging bond funds with those showing greater momentum.