Updated: Jun 30, 2021
Last week the S&P 500 recorded its best week since 1974, continuing the trend of unpredictable breakneck movements witnessed over recent weeks. While investors are still licking their wounds following the fastest market correction in history, the Trillion-Dollar question, “What’s next?” remains unanswered.
There are two polar views here. One claiming that the bottom is in and markets have already begun to claw back losses on the back of extensive Monetary and Fiscal support, signs the virus has passed its peak in Europe, and the belief that pent-up demand will emerge once the uncertainty subsides.
On the other end of the spectrum, investors argue that with no clear indication that the pandemic is under control, economic activity at a standstill, bonds now facing new strains as liquidity concerns rise and an ominous earnings-reporting season still to come. There is considerable downside potential yet to be realised.
So, which is it? Unfortunately, while the latter seems more probable given the unprecedented economic strain, the truth is, nobody can predict the future market movements with certainty as there is simply not enough clarity around the potential duration of the virus.
Not to mention the fact the FED have officially thrown the playbook out the window, opting instead for an apparent ‘anything goes’ approach.
What I do know is that the uncertainty of short-term market moves should not be the primary focus here. Far too often, investors are preoccupied with attempting to pinpoint the exact moment the market hits an absolute bottom. Unfortunately, the market is a fickle beast, and trying to time it to perfection is a humbling endeavour. While nobody wants to be the guy buying just before the dip and the psychological benefits of buying at exactly the right time are undeniable. This buy low, sell high mentality is a fool’s errand. Studies have shown that long-term return differences are insignificant at best.
So, if timing the market is not the way to go, what should you do? In true stoic sentiment, focus on what you can control.
Time in the market is more important than timing the market.
For your average investors, a default buy-and-hold strategy is the most successful long-term approach as it allows you to participate in the rising tide of the equity market without falling prey to the emotional fallacies that come with short term stock price fluctuations.
The benefits of diversification have been well documented and were highlighted once again in recent weeks as Treasury values rose sharply amid the equity market decline. Your goal when diversifying is to lower the risk profile of your portfolio by adding non-correlated or inversely correlated investment strategies. This combination of assets that move independently of each other will allow for a more consistent and predictable return irrespective of the current investment climate.
A strategy whereby you invest equal dollar amounts in the market at regular intervals, rather than trying to perfectly time the market, you buy in at a range of different price points. This approach removes the psychological burden of investing a lump sum all at once and reduces your risk of buying at the least opportune moment.
So instead of wrestling with the idea of putting $1,000 in today, invest $250 every week, over the next month.
Tactical Asset Allocation
Too often, we tend to think in absolute terms, all or nothing scenarios. Instead of wildly looking to sell everything or invest your life savings all at once, take the time to structure your portfolio so that you can take small and deliberate steps to tactically adjust your asset allocation. Take advantage of opportunities in the market as they arise, reducing stock exposure as valuations peak and increasing exposure following a market correction.
While the recent sharp declines are hard to stomach, the stock market has shown resilience over time. In all previous post-recession periods in history, markets have recovered and went on to exceed their previous high-water mark. That being said, there are still some potential minefields out there that need to be avoided as some of the more exposed companies may falter under the mounting economic pressure.
With this in mind, don’t fall into the value trap and buy stocks that look cheap on the surface; many of these are cheap for a reason. Look to buy stocks with strong fundamentals, large balance sheets, long operational history, significant moats, and a loyal consumer base. In short, markets will improve, and these well-established companies will be the cream that rises to the top.
If you see your name in lights and are hell bent on taking a punt at some of the riskier stock picks with dreams of exponential returns, just make sure to err on the side of caution. Maintain 85–90% of your stock portfolio in more defensive, well established, liquid, large cap companies. Remember, the number one rule in all this is simply ‘don’t go broke’. It’s not about outsmarting the market, it’s about positioning yourself so you participate in the rising tides of markets over the longer-term. Gambling the house and kids tuition on some obscure cruise ship company that’s down 90% is more likely to lead to divorce than a house in the Hampton’s.
In short, be the tortoise, not the hare.
If the volatility and uncertainty of equity markets become all too much to bear (pun intended), Alternative Investment Funds such as Venture Capital, Real Estate and Private Equity may offer some respite. With little to no correlation to the stock market, specific Alternative Investments can remain unaffected by economic, political, and social instability, adding a much-needed layer of diversification to your portfolio while simultaneously offering a higher risk-adjusted return. At Holdun, our uncorrelated Alternative Investment Funds provide shelter from the oscillation of the volatile equity market without sacrificing your upside return potential.
It’s natural to be hesitant to invest, following such a sharp correction. Regardless of whether we have already seen a bottom in markets or whether there are further declines to come, setting up an investment strategy that focuses on your long-term objectives, and implementing some of the approaches mentioned above, is likely to pay-off in the long-run, while obsessing over the perfect time to buy is likely to leave you sitting on the sidelines.