Over the past couple of months we’ve had all eyes on you and to state the obvious it’s been a wild ride! With all the recent volatility, the risks (and rewards) of the stock market were on clear display but today we switch gears to a different asset class and share some insight from our friend and guest author, Mr. Brian Chou, Esq.
Owning investment real estate can be a very rewarding and profitable experience, but it can also be a huge headache and a drain on resources. I remember when I purchased my first investment property several years ago, my head was filled with conflicting images of myself sunbathing on my private island and lying penniless in a gutter. The possibilities and the liabilities seemed endless. Continue reading →
Since 1950 you (the market) have risen an average of +1.4% over the last five trading days of the year. We typically see some tax loss selling in the early part of the month and then a positive finish to the year. Over the past 45 years, 34 of them have helped make this seasonal phenomenon seem real but this year is looking like Santa will bring a massive lump of coal instead of a rally.
While most Decembers in general are positive, this one so far has literally been the worst since 1931. It actually goes beyond just a bad month that is normally positive; as you can see from the graphic we put together below this market has been struggling for the entire fourth quarter.
Large Caps, as measured by the S&P 500, are very close to touching bear market levels. Whether we need to officially hit the -20% (official bear market definition) or not shouldn’t matter; it’s flat out dismal out there. Notice how both Small and Mid Caps have already reached bear market levels. Even though bonds have not had a great year they have at least mitigated some damage for those who have exposure to the asset class.
All that said, there has been very few places to hide and the fear levels are mounting. If you don’t have any alternatives or bond exposure in your portfolio you are basically at the will of the market and will have to either throw in the towel or ride it out. Those that do have an allocation with exposure to other asset classes outside of stocks have options.
We recently wrote a rough sketch on how we would approach portfolios if this indeed turned into a bear market. Many investors will fold up and do the worst thing you can do; sell and cement losses with no strategy aside from quitting. Our goal is not to “throw good money after bad” and keep buying into a market that is getting slaughtered but rather tactically take advantage of asset classes that are more resilient than equities.
Going back to our grid above…let us ask you a question:
What should you buy and what should you sell?
Our short answer is that we will gradually sell some alternative assets (not listed in the above grid but mentioned in this blog many times) and about 5% of our bond exposure. From there we plan to first nibble at Small Caps and the Mid Caps as those have been hit the hardest the past three months.
We’ll update our readers and clients more later but just because Santa didn’t delivery a rally this year doesn’t mean the stock market is broken forever; it’s merely giving you an opportunity to do something different than you did last time.
In all of our letters to you it’s been well documented how volatile and irrational you can be. You clearly have a temper and even when there is an abundance of good economic news you can still make us squirm and sweat with how you may react. What compounds your behavior is how traders and investors label certain charts and patterns. Most recently we’ve been alerted that you have signaled another mess on the horizon with an ominous reading of the “Death Cross”.
We typically write you letters about your volatile actions and the erratic behavior you bestow upon us as investors. Many of our letters also try to put certain economic events into perspective so that people don’t let your wild stock market swings force them into making bad decisions. All that said, it’s come to our attention that we can finally roll out the answer to a question that is not always obvious:
What should an investor do if a standard stock market correction turns into a bear market?
First off, let’s revisit the basic definition of a correction versus an official bear market. Click here for an article we wrote during the last correction in February, which incidentally at the time felt like the end of the bull market had finally come. Although the market sold off almost -10% in a short span, it clearly came back to reach record highs until October came around.
Let’s get this part out of the way…You’ve made a lot of people ill the past few days. As a matter of fact you’re following through on staying true to form by making October another historically miserable month.
After a two day blood bath we’re seeing a little bounce leading into the weekend but the stock market basically negated what was a surprisingly pleasant summer stretch. We’re now sitting around July levels and the previous correction in February of this year is suddenly somewhat deja vu. What’s not much different is the fact that most financial advice remains the same : “Stay the course. Don’t panic” Diversify.”
What happens in September often follows through and even intensifies in October. That being said just because “X happened last time” doesn’t mean “Y will happen this time”. We believe there will be more anxiety than normal this time around. The stock market and it’s bull run are not only long in the tooth but we also have mid-term elections coming up which regardless of real substance…they will stir up emotions and uncertainty. If we get a “red wave” you’ll likely see the market advance even higher for a few months and if we get a “blue wave” it’s our opinion there will be a sell-off. This is not a political opinion on which party is “better” so please remain calm; it’s simply a fact that if we have a meaningful shift in power there will be political gridlock for a couple of years. Long story short…one result will cause increased volatility and in our opinion the other will lead to that long grinding slow down where we actually could see the stock market finally roll over and enter a new cycle.
So…”don’t panic”? Well….sort of.
We’re going to share some of that same counsel but with hopefully a bit more actionable advice; do something! Continue reading →
We don’t make it a regular practice to be ambulance chasers every time there is a tragedy or natural disaster. That being said, almost every major event (whether it’s considered good or bad) can create an opportunity for your investment portfolio.
Conversely, the old adage of “less is more”, could certainly apply here. We’re not simpletons just for the sake of it but in general the ‘less is more’ approach can greatly benefit your finances. Think about it…and if you haven’t already, we’ll spell out several major ways that having less of something will benefit your wallet: Continue reading →
Our letters to you typically center around the stock market, the economy, and related investment topics. At the end of the day, however, what is wealth (the accumulation, growth, and preservation of it) all really for? That answer is different for everyone but from our experience in meeting with thousands of investors ….it means nothing without family. Losing a loved one is always painful but when it’s your spouse there are also several financial issues that arise and knowing how to navigate is critical.
The following article is written by a guest contributor, Lucille Rosetti (see credits at the end): Continue reading →