Investors will be holding their collective breaths over the course of the next week or so. The markets have moved back up to the top of the range from which we have seen so many failures over the course of the last year. This is a critical time for the global stock markets. Either stocks will breakout to new highs and move up sustainably or investors will be very quick to jump ship and avoid taking another June type bath in their portfolios. As such, this is an ideal moment to revisit your investing discipline and consider taking some action. Let’s do that.
Setting Your Investment Goals
Of course everyone wants to make as much as they can in the way of investment returns but we all know that the path to success in real wealth creation is not often the quickest path (getting rich quickly) nor is it about making a big gain and then subsequently losing it all in the next bear market. Our firm has an explicit investing creed and it goes like this:
We are seeking “Success” over a reasonable “Judgment Period” by knowing when to embrace and reject conventional wisdom regarding perceived market trends, “Risk” and opportunities. Superior, above average, results over time are only achievable through unconventional decision-making, experience, and discipline.
Risk (defn.) – The probability of unrecoverable or semi-permanent loss of capital, not to be confused with variable degrees of periodic volatility.
Success (defn.) – Generating asymmetrical results across all investment strategies: to expose ourselves to return in a way that doesn't expose us commensurately to risk, and to participate in gains when the market rises to a greater extent than we participate in losses when it falls.
Judgment Period (defn.) – A period of time that captures a full investing cycle including both bull and bear markets – typically any rolling 5-6 year period.
What you will notice is what our “creed” does not say, like beat the S&P 500 or this fund or that stock every time. Conversely it speaks to our inner sense of the right way to build wealth – making high risk-adjusted returns where the return ON your capital is just as important as the return OF your capital. Today, we recognize that our more defensive systems and strategies will necessarily lag select stock only benchmarks. We accept that as the price of pursuing “Success” as described above.
But You May Be Feeling Like This Now
There is a perception that returns are just out there, ready for the taking. If only you can find them, get them, reach for them. This is simply no longer the case. Returns, the kind you make and keep, are elusive now. Globally, stocks are barely positive since July of 2014 and most stock indices are negative since April of 2015. Bonds are either flat or negative by 4-5% YTD. Some sectors are up huge, like biotech and select internet, but others are down just as hard like basic materials, energy, metals, mining and utilities.
This is that zone in the investing cycle when you might repeatedly circle back to the leader board among mutual funds or look too long at a stock like Netflix (+130%) and wish you had all of your money in those big winners. You might be enticed to make changes in your portfolio and quietly do a bit of return chasing, behind closed doors. Last week, it was reported that $156 Billion came out of actively managed mutual funds and moved strongly into passive International ETFs and equity funds. As I've said repeatedly, this is that time when bad behavior becomes pronounced. Actively managed funds are typically those that attempt to trade away market risk or move proactively into better-valued positions. Yes, they are lagging any of the passive indices but they will also be the very funds that offer real relative performance once the market trends actually turn lower. Make no mistake; Pulling out of "safer" things and putting your money into "riskier" things now is simply the wrong choice. That day is in the future.
To our many pre and post retirees - from a planning perspective we structure portfolios to at least meet your annual withdrawals. Your withdrawals are quite regular but returns are not. You will need to endure periods of flat returns or losses along the way (this can be a scary time). But rest assured, there will be healthy gains on the other side of this Transition Year which looks like it may push into mid 2016.
To everyone else - There is never a time in your lnvesting life to become undisciplined. Your investment must match your tolerance for periodic losses. Everyone can "tolerate" gains of all types but loss tolerance is the important thing to really understand at a personal level. Today, I see young and old becoming disconnected from their own risk tolerance and I'm hear to talk you down literally. If you want opportunity, look down. Look into the wildly oversold energy, metals, and basic materials sectors. Even gold will one day rise from the ashes. All are in steep declines, which will one day reverse. There is an incredible buy developing in commodities but it's still a bit too early. After a few rate hikes, we might look again to utilities and other interest sensitives as well. What are not attractive are things trading at insane multiples like names in the internet and biotech space. We own several names in these sectors and continue to enjoy the ride higher but certainly not looking too add exposure here.
What They Don’t Want You To Know (or do) – #3
You won’t hear this type of commentary from anyone in the industry because most of the financial services industry is comprised of sales people with one goal – getting your assets invested under their company flag. For #3 of this series, I'm going to tell you what I'm doing for my own personal account that might be counter to the common message in our industry. I am queuing up cash to invest in stocks and commodities at a later time and lower levels. I am not adding any new money to this market. All 401k contributions, 529 contributions are now directed to cash where they will sit until I have a good reason to deploy cash like better values or a new surge in technical/ fundamental evidence. Do yourself a favor and do not add new cash to your investments at this time. I’ll let you know when to do so via our “Calling All Cars” alert. I simply can’t be more of an industry contrarian than that.
This is not the end of the Bull Market Yet
Statistically, according to Jim Stack of Investech, a majority of bear markets have begun within 7 months of the first rate hike by the Fed. I can easily see a quick deep correction in stocks surrounding the first rate hike then a strong move out to all time new highs in the subsequent months. That last run to new highs could prove to be the last run of this bull market unless we see a real surge in earnings or economic activity. Smart investors will be ready for maximum defense in the next 10-12 months with the knowledge that bear markets on average retrace 1/2 to 2/3 of the previous bull market gains. We're not interesting in riding through any such event given the enormous gains of this 6-year old bull market.
Consider This Today
Today, I see a market that is running into some new selling pressure just as it tags the old and very worn top of the range (S&P 2130). If you feel over-exposed to the stock market, this would be an excellent moment to cut out or reduce lagging positions. We did this today in several strategies. If the market wants to break out to new highs, it will do so in the next week. We can then redeploy short-term cash into positions that are leading the new surge higher and stay invested in a strong group of investments being careful not to chase the wildly overvalued segments of the market. If the markets want to sell off hard and revisit the June lows, we have just cut exposure at the very highs of the year.
That’s it for now – stay tuned