I argue the exact opposite. The overwhelming percentage of average investors increased their exposure to tech stocks in the dot-com fueled 90’s on the irrational exuberance of the “New Economy.” Had they had a plan to reduce stock exposure by selling or hedging, they would not have lost 50%, 60% or 70% of their tech-heavy portfolio while holding-n-hoping through the 2000-2002 “teck wreck,” nor would they have sold near that bottom, nor would they have struggled with the decision of when to “get back in.” Similarly, when the average investor slowly began putting money back to work in the 2002-2007 bull market, becoming more confident along the way, the average investor did not have a plan in place to lower the stock risk in 2008-09 systemic collapse of the financial system, nor did the average investor have a plan to reintroduce exposure as volatility subsided and trendlines turned positive.
Simply stated, you may set out to hold your core positions until you pass them on to your heirs. However, if you’re like the rest of America, you won’t. You will sell in a fiery panic when the kitchen heat becomes too much to handle. And it will be at a lot lower price than at a stop-limit loss order that you set up in advance.
Having a discipline for buying and selling/hedging from the get-go is indispensable. It is the reason that my colleague Rob Charette and I developed the FTSE Custom Multi-Asset Stock Hedge Index (a.k.a. MASH Index). This is not a “bear fund.’” The index does not look to go short or use leverage. Rather, the index is comprised of assets that often succeed when safe haven assets in the non-equity realm (e.g., currencies, foreign sovereign debt, U.S. bonds, precious metals, etc.) are desired by the investing public. Often the desire is greatest when stocks fall out of favor, but they may perform in stock uptrends as well. Year-over-year, the FTSE Custom Multi-Asset Stock Hedge Index has done just that, with 7%-plus gains to the S&P 500’s 9%.
The above chart represent year-over-year results through January 14. Yet on Thursday, 1/15, one of the index components, CurrencyShares Swiss Franc (FXF) pole vaulted 10%-plus in a single trading session. Why? The Swiss Central Bank dropped its euro peg, apparently willing to hinder the country’s exports in an attempt to defend the currency from “QE-style” electronic money creation in the euro-zone. SPDR Trust (GLD) also received a 2.5% boost from perceived currency debasement. Gold is another index component.
One final word on late-stage bull markets. With QE3 ending this past October, and stock market volatility rising ever since, U.S. stocks as an asset class may be losing its place as the undisputed champion. A cursory glance at the above-mentioned chart – where MASH is achieving total returns that are not too far off the results for the more volatile S&P 500 – suggests that stocks may require an indirect boost from members of the U.S. Federal Reserve Open Market Committee. Specifically, the stock market may need to hear something that suggests impending rate hikes will be pushed back into Q4 2015 or Q1 2016; if selling pressure gets bad enough, a reversal might require hints of the potential for QE4.