By Jonathan Bernstein, Stringer Asset Management
The number one question we get from both advisors and investors in this market is, “what should I buy if I want to dip my toe in the water?”
This question is very difficult to answer in the context of individual companies and stocks but stepping back to gain a broader perspective may provide a clearer path to an answer. I would be remiss to not first acknowledge the devastating humanitarian impact of this crisis. It’s affects will prove to be far reaching and immeasurable in terms of the emotional and cultural impact for generations. In that vein, I’m wishing our readers peace and health. For purposes of this article, we will table that and focus solely on the economics and strategies related to investing for a future economic recovery. Consider that this market decline is unprecedented and what started as an event-driven market collapse due to the global pandemic combined with a breakdown of the energy sector evolved into a systematic dislocation that roiled both equity and fixed income markets. The difference between this event and other economic and market downturns is the velocity of economic disruption and the still unknown impact it may have across the business landscape in the quarters and years to come. Although we saw equity market valuations contract and fixed income markets seize up, the way back may not be as simple as buying names you know or those who went down the most. Below are several points that we believe investors should consider when navigating the way back.
- Dipping a toe in the water with individual names is not like checking the temperature in a well-maintained pool. In fact, it’s more like dipping a toe into a swamp where the water is murky. At this time, we don’t know what lurks beneath the surface and we don’t know how deep it is. It’s difficult to evaluate an individual company as it pertains to the impact on revenue, earnings and even whether an individual company will have to lever up through federal lending programs in this current crisis. Many companies could be in a situation where they need to simply rebuild their balance sheet over time. Others may have to restructure certain aspects of their business or alter some of their future growth plans. Investors that have doubts about their ability or the transparency required to analyze individual stocks may want to consider diversifying across sectors and industries. This method helps remove the individual company risk and spreads it across broad asset classes, sectors, or subsectors. There are also different weightings and quantitative structures they can choose from to fine tune their investments to match their thesis.
- Many investors understand Modern Portfolio Theory and subscribe to the conclusions that individual security selection accounts for a minimal variation in portfolio returns and that asset allocation decisions are far more impactful. Now is not the time to abandon the lessons of the past. Spreading the risk across diversified investments can give investors participation and allow them to take advantage of a broad market recovery without having to guess which specific sectors or business models will best survive a scenario that no one planned for. Some corporations may navigate this well while others may not. By owning a diversified allocation, investors can be generally right about a recovery and reduce the risk of being specifically wrong about an individual company’s or sector’s ability to weather this crisis.
- A combination of strategic and tactical investments strategies can give investors an advantage as they build their way back and beyond. Managers of strategies that have a process for raising, holding, and redeploying cash can make a lot of sense in this market. Strategic allocations can help investors to stay the course in a diversified fashion. Tactical sleeves can raise cash to potentially protect from further downside while leaving dry powder to hopefully pick up discounted assets in the eventual recovery.
Simply put, asset protection in markets like this can be helpful to achieving future gains. To illustrate this point, a 20% reduction in a portfolio’s value requires a 25% gain to get back to even whereas a 30% reduction in value requires almost a 43% gain to get back to even. Mitigating losses can make a financial journey back much shorter. We think having a well-defined process to help protect the downside and to take advantage of the upside are keys to this market.
- Remember the behavioral aspects and impacts of these uncertain markets on investors. Tapping into the expertise of active managers who can move tactically can also be of benefit in terms of behavioral finance. Many investors like to see some level of activity in their portfolios. Additionally, many investors take comfort in the idea that a manager is at least trying to protect them during high impact market events. Having a process that triggers some level of cash to cushion the downside during volatile periods can help reduce drawdowns and calm investors’ bias for action. Furthermore, having some dry powder (e.g. cash) within a portfolio can help investors feel more optimistic about the ability to take advantage of near-term opportunities.
In conclusion, just as you did not call the top, avoid trying to call the bottom. In these difficult and unprecedented times, it is important to invest according to a well-defined process that covers both falling and rising markets. We prefer to have a plan in case of an emergency, similar to an airbag, and to make sure we maintain that plan. If you don’t have a specific plan in markets like these, it may be well worth the price of admission to utilize a professional manager who does.
Any forecasts, figures, opinions or investment techniques and strategies explained are Stringer Asset Management, LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested.
Data is provided by various sources and prepared by Stringer Asset Management, LLC and has not been verified or audited by an independent accountant.