Evensky: Market will be muted

Harold Evensky, president of Evensky & Katz Wealth Management, remains hopeful about solid short-term market performance but doesn’t expect too much.

The recent market run will end, and returns will be muted, he believes.

Mr. Evensky also recognizes the threat of potential black-swan events that could cause significant damage.

“Everyone now seems to think they have a good crystal ball, but people weren’t necessarily ready for Cyprus,” he said. “North Korea is another one that could blow up at any time and cause short-term damage.”

In his model portfolio, Mr. Evensky uses what he refers to as constrained market optimization to make forward-looking estimates and incorporate risk.

“The optimizer gets bizarre conclusions … Sometimes what we’ll run with isn’t theoretically the best, but it makes the most amount of sense,” he said.

The resulting model portfolio plays it safe with 26% core fixed income and 46% core equities but takes a riskier approach with 12% equity satellites and 10% open-mandate fixed income.

The short-term exposures from equity satellites are meant to complement the core equities, but can spike returns.

“More often than not, taking larger risks has proved to be pretty successful if done smartly,” Mr. Evensky said. “It just can’t be guesswork, and the risks can’t outweigh what you know will be successful.”

Mr. Evensky’s clients also hold a 6% allocation in alternatives meant to diversify the portfolio through the AQR Managed Futures Strategy Fund (AQMIX) and the ASG Global Alternatives Fund (GAFYX).