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These are the hard days.  When stocks are down, portfolios are down, the world is down and headlines speak of nothing but The End.  How do we keep our sanity and stay in control in the face of it all?


Emotional Capital


In our world of risk management, we are always focused on preserving capital.  Of course, this happens to various degrees depending on the type of investment strategy we’re talking about.  Our stock strategies are allowed larger losses because stocks are naturally more volatile.  Our bond strategies don’t have to tolerate capital loss much at all but then again; they don’t offer the bigger gains either.   None of our strategies are bottomless but nothing is absolute in the investing world.   There is no such thing as investing without periodically experiencing some portfolio losses.  Anyone who offers such a thing is selling you something.  As we’ve always said, investors cannot avoid risk as much as manage it.  Now all of this is speaking to dollars and cents.   Emotional capital is also something to manage because it is subject to its own form of destruction in all markets!  Think about the guy who sat in cash with his entire net worth watching the US stock market rise for almost six full years and nearly 200% gains.  I have seen this situation more often than you think.  Now think about the girl who is still fully invested and hoping for a rebound in stocks to get out at a higher price.  Day after day, full invested, hoping, wishing, and not wanting to look.  She will sell at the lows like everyone locking in emotional (and financial) losses.  Bad decision making is a bit of a viral thing.  One bad decision, if left uncorrected (aka unsold) leads to more bad decision making.  We hold things too long (see trading error #1 from a few weeks ago).  Then we try to buy something too early in an effort to get back to our high balance faster only to go through that horror show of “OMG, THIS ISN’T THE LOW”.  Once our emotional capital is drained, we have no capacity to hold anything for very long.  This happens in the early phases of a new bull market when we should be buying AND HOLDING a lot of stock.  Instead we buy Apple at $100, sell it at $110 and watch it go to $600 without us (see trading error #2).  Or we can only get ourselves to buy $100 worth of Apple stock (Trading error #3).  Staying sane, as an investor is all about preserving your emotional capital in order to grow or preserve your wealth at the appropriate times.  Accept the fact that we will all lose money periodically, but keep those losses contained.


Looking back over the last 3-4 months, I can spot plenty of short-term trades that lost money.  These are buys that didn’t work out and were sold shortly thereafter for a small loss.  In fact we sold another position purchased in June for a small loss today (XHB – Homebuilders ETF).  Yes these add up and negatively impact our “returns”.  But, we also still have winners in our portfolios that were purchased 1-3 years ago, with larger gains and we hope to hold as long as they remain in fundamentally and technically favorable.  Last week, we sold our long standing leveraged healthcare position (HCPIX) that was purchased in 2012 and 2013.  We sold it because the long term trend turned down and we could no longer justify holding it.  We will own healthcare again and hope to buy it back at a lower level.  Did we sell at the top?  Hardly.  Did we capture a very nice long term gain?  Yes.  Was this gain larger than many of our short term losses combined?  Yes!  George Soros said it right.





Now with 50% or more in cash across all strategies, we have our emotional and financial capital intact, ready to buy when the situation presents itself.  This is how we keep our sanity.



But My Portfolio is Down $10,000, or $100,000 or $200,000!


Yes, yes I know and we don’t take losses of any kind lightly.  But we do measure them against the market, our expectations, our internal risk tolerance per strategy and most importantly our ability to recover from losses.  Currently, the aggregate total of our assets under management are down a little over 6% YTD.  This is a very rough number as it includes new accounts, terminating accounts, additions and withdrawals.  This year, we have had very little flow of accounts in terms of new or terminating accounts but we do have a natural 3% annual withdrawal rate from retirees and others living off of their investment balances.  All things considered, a 6% decline in Assets Under Management is probably too aggressive to be considered losses due entirely to market.  Either way, we’re not talking about a big number.  YTD, the US is the best looking horse in the glue factory and is down about 9%.  Take a look at the chart below as of last Friday.

Many global indices are now in full bear market territory, others are deep in corrections of 15-20%.  Recoverability is coming into question among these forever fully invested indices.  Some are already well beyond a level that we would consider reasonably recoverable as it will take years and years just to get back to the 52 week high levels.





We all feel the pain of wealth deterioration as it’s happening now.  Trust me, our personal accounts are right in there with yours.  However, we remain quite sane knowing that these are recoverable losses and now we are largely (literally a majority of assets) sitting in cash.  Recovery periods for the typical household invested with our firm, after full fledged bear markets, are often less than 18 months, sometimes less than 12 months.  For those pulling money out monthly for living expenses, these recovery periods can be longer.  For those willing or able to add money to investment accounts at market lows, recovery periods are shorter (hint!).   Then there is that investor that never recovers from a steep portfolio loss.  This in the investor that gives up, who sells everything in total disgust and anger.  This is the investor who has gone insane and feels there is no hope for a better tomorrow.  After selling everything, the better tomorrow arrives… and the virus spreads. 


Behavioral finance is probably more important for investors to understand than actual finance when it comes to investing.  This is meant to be a feel good update at a dark moment for stocks.  All is well here at ASFA.


Give us your thoughts – Do you like more event driven updates?  Is this the type of content you want to hear?  Let us know.




Sam Jones