“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”
We like this quote from Daniel Kahneman, one of the original Behavioral Finance thinkers. Unfortunately, predicting the future and the end of a bear market is difficult. So, in this WJNotes, we focus on what we know.
- Lower current prices mean future higher returns. Markets reward those that hold on during the tough times. They punish those that do the opposite.
- Regular 20 to 50% declines in stocks are the price we pay to earn long-term returns above cash. Markets reward “prudent” risk-taking. No risk means no return.
- We prepare for bear markets before the fact. Broad diversification using multiple uncorrelated strategies, tail risk hedging, and rebalancing will help protect portfolios when stocks decline. These strategies have been in place in your portfolio for years. We build a levee before the rain starts.
- Something will thrive in a bear market. Finding the winners typically requires ignoring convention and looking beyond stocks and bonds. In this selloff, managed futures/trend following funds have performed strongly (up double digits this year). Tactical strategies have also added value and reinsurance is positive for the year.
- The types of bonds in your portfolio matter. Yes, bonds are down. But long-maturity bonds are down multiples from short maturity bonds. We own few long-maturity bonds, and, as a result, bond portfolios are down only about half as much as their benchmark.
- Yesterday’s excesses are today’s disasters. Although, they are hard to resist at the time, resist you must. Cryptocurrencies, Cathie Wood’s ARK Fund, speculative electric vehicle stocks, Zoom, Peloton, GameStop, AMC all mooned during COVID, and all are down 60% or more. As Warren Buffet is famously quoted as saying, “Only when the tide goes out do you discover who’s been swimming naked.”
- We knew we would experience this type of downturn in stocks. Just not when it would occur. We use “Monte Carlo” simulations to stress test financial plans against one thousand future market scenarios. Including some like we are in now. We know we will experience many market selloffs in the future, and we plan for them. Therefore, your long-term financial goals should not be in jeopardy. If you would like to discuss further regarding your particular situation, please set up a meeting so we can review your plan.
- Although the stock market may seem like a huge casino in times like this, it is not. Stocks represent ownership in real businesses that generate cash. Assuming most companies survive, and most will, you can now buy future cash flows cheaper than you could six months ago. This is an opportunity we take advantage of through rebalancing.
- Your long-term financial success is dependent on how you act now. Don’t panic. As we’ve stated in your Investment Policy Statement:
“Finally, and most importantly, a comprehensive, specific set of investment policies minimizes the temptation to alter a sound investment program because of irrational fears or the short-term volatility of the market. “
- Pundits, many of them charlatans, will claim they knew what was coming. Most have been preaching the same warnings for years. Remember, “a stopped clock is right twice a day.” Or they were simply lucky this time. Either way, they are not reliable sources, so ignore them.
We’ve placed some trades in portfolios over the last week. The trades were for the following reasons:
- Rebalance portfolios back to target weights.
- Add additional tail protection through Simplify US Equity Plus Downside (SPD) and Simplify Tail Risk Strategy (CYA).
- Increase protection against panic by extending bond duration through Simplify Risk Parity Treasury (TYA).
- Capture unrealized losses for tax purposes.
We will continue to look for rebalancing and tax loss opportunities if the bear market persists.
We’ve been through this before, multiple times. We are available to discuss your portfolio and financial plan. Please call us if you would like to talk. Unfortunately, we can’t answer the ultimate question posed above, but we can provide perspective and an objective review of your current financial situation.
