Mike Bayer considers himself a contrarian investor.

In the past few months, as stock markets soared, that sort of go-against-the-grain approach has taken center stage.

The Toronto, Canada-based adviser and president of Strategic Analysis Capital Management says he prefers to buy exchange-traded funds when they’re out of favor.

“The problem most investors have is that they tend to trade too frequently and make changes in the wrong direction. They’re buying high and selling low,” said Bayer, who works with individual and institutional clients in Canada and the United States.

Since early March, SACM has been taking advantage of the rally in stocks to rebalance client portfolios. Bayer has been trimming positions in the Vanguard Emerging Markets Stock ETF (NYSE: VWO).

“Emerging markets have had a big run-up in the past few months,” he said. “I’ve been carefully monitoring portfolios to make sure they stay within our asset allocation limits. In cases where VWO has exceeded those bands, we’ve sold positions and redeployed proceeds into mainly bond funds.”

The proceeds from selling VWO have been mainly going into buying more fixed-income ETFs and funds, says Bayer. Those include the iShares Barclays TIPS Bond ETF (NYSE: TIP) and the iShares Barclays 1-3 Year Credit Bond ETF (NYSE: CSJ).

“Usually, we’ll use a band of about 5% to determine when to make changes,” he said. “But that’s not a hard-and-fast rule. If someone’s in a taxable account, we’ll customize our rebalancing strategies so people can take advantage of tax-loss harvesting and reduce their overall tax liabilities.”

Taking A Cue From History

Bayer says he’s a big fan of simplicity in investing. He likes to stick with four to seven funds built around the long-term needs of each client. “The portfolios are built around broad diversification, but they don’t include commodities,” he added. “That asset class tends to add too much volatility. And over time, it doesn’t necessarily add any additional return.”

In a typical portfolio with 60% equities and 40% bonds, Bayer likes to keep around 45% of total stock assets in funds focused on the U.S. and Canada.

With a total stock market approach, he’ll use the Vanguard Total Stock Market ETF (NYSE: VTI) or the Vanguard Total World Stock ETF (NYSE: VT). In cases where VTI is implemented, at least 60% will go into that fund.

But with clients who don’t mind being a bit more aggressive, Bayer prefers to slice and dice allocations. He’ll put an equal percentage of U.S. stock allocations into the four corners of the market: large-cap value, large-cap blend as well as small-cap value and small-cap blend.

In a slice-and-dice portfolio, Bayer uses the iShares Russell 1000 Value Index (NYSE: IWD) and the Vanguard Value ETF (NYSE: VTV). He balances those with the iShares Russell 1000 (NYSE: IWB) or the Vanguard Total Stock Market ETF (NYSE: VTI).

“If you have a long time horizon and can handle the volatility, slicing and dicing the market can really provide some extra benefits,” said Bayer. “But a slice-and-dice strategy isn’t necessarily the easiest type of portfolio to hold. You need to remain very disciplined to make it work well over time.”

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