It’s a risky strategy to write about prevailing market conditions in a commentary that will not be read for a few weeks, or longer. Mr. Market has the mind-set of a two-year-old. Like a toddler, you never know how long he’ll stay happy and calm or when he will start to throw a tantrum.

Fully cognizant of this risk, I’m going to discuss the market environment, because the stock market has been experiencing a period of unusual calm. Through May 17, the S&P has only risen or fallen by more than 1% on a daily closing basis just four times this entire year. Typically, such moves occur 4.25 times per month, according CFRA chief equity strategist Sam Stovall. Earlier in the month, the Chicago Board Options Exchange’s fear index, the VIX, closed at its lowest level since 1993. (Lower VIX values imply traders are paying less to ensure their portfolios against a future volatility; a lower value equals less demand for insurance.) Over in bond land, indicators imply little worry about an increase in defaults.

While nobody complains about calm market conditions, they can be dangerous. As I wrote in my May 11 Investor Update commentary, periods of low volatility can lure investors into thinking they can handle more risk than they actually can. Periods of low volatility boost your sense of confidence by diminishing fears about a downturn. They also alter your sense of what is normal.

I bring this up because in this month’s issue we have articles about how to allocate your portfolio from two people with many years of investment experience: Paul Merriman and Walter Weil. We also have third article, by me, about how to tilt your portfolio toward stocks with certain factors (e.g., value, momentum, etc.). Last month, we published a portfolio strategy article by Mebane Faber of Cambria Investments along with an update to our Model Fund Portfolio and Passive Level3 Portfolio. All of them can work well… for the right investor.

AAII has a large membership base. Demographics, financial goals, risk tolerance, a willingness to deal with complexity and the desire for involvement all vary, widely. Offering a single strategy and saying this is the one everybody needs to follow is a bit like operating a clothing store and selling only one suit. Even if multiple sizes are available, the fit isn’t going to work on every body. Neither is the color, or the style. Some people will not want a suit at all.

Investing is the same way. There is no single portfolio strategy that will work for every person.

There are commonalities: Clear-cut rules for implementing the strategy must exist. Costs must be kept low. Turnover should be lower rather than higher. Above all else, the portfolio must fit the investor. No matter how great a strategy sounds, if it’s not something you can stick to no matter what the market is doing, or if it involves too much risk given your personal situation, don’t follow it. It’s not the right strategy for you.

As an editor, my preference is to present a range of thoughts and theories. We give you the ideas and let you choose (even though we have our own preferences). In doing so, realize there is no rule that requires you to pick a single approach. Rather, you can mix it up. Take a little from this approach and a little from that approach. So long as you do it in a logical manner and you can follow what you’ve put together, a strategy built from several approaches can work.

Think of it as a suit (or some other piece of clothing, if you prefer): Most of us buying off the rack require alterations to make the suit truly ours. The same can be said about portfolio strategies. Find one you like, and tailor it to your needs.

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII