Hope all of you are staying healthy and trying to enjoy the social distancing as much as possible. As most of you know, we are a big believer in transparency when it comes to the investment strategy regarding your portfolio. This is your nest egg and you should know and understand the strategy and thought process that is being used to manage it for the long term.
In this piece, I am going to attempt to explain to you in general terms (as all portfolios are a bit different based on your risk and financial profile) the overall investment strategy regarding navigating this truly unprecedented health crisis.
In this piece, I am going to attempt to explain to you in general terms (as all portfolios are a bit different based on your risk and financial profile) the overall investment strategy regarding navigating this truly unprecedented health crisis.
First a quick recap of the long-term strategy
The strategy is basically a technical analysis driven, risk based, long-term strategy. The process can be best described in the following points:
- Long-term time horizon – The strategy is designed for a long-term investor with a minimum of a 3-5-year time horizon
- Identify the long-term macro market trend – moving upwards (bullish), moving downwards (bearish) and moving sideways (neutral)
- Allocate a well-diversified portfolio based on long-term market trend, your risk profile and your investment goals
- As the long-term trend of the market changes, slowly tweak allocations to adjust risk as conditions deteriorate or improve overtime
- The primary focus of the strategy is to reduce overall risk by meeting the primary goal: “When markets are going down, lose less than the market”
How this market downturn is different
As this is about investment strategy I am not going to the go into the detail on the virus. Unless you have been living under a rock, by now I expect you are somewhat of an expert in Covid -19 anyways.
From a financial market point of view this is an unprecedented downturn for the following reasons:
1.The rate at which the market declined from the high has never been seen before
The S&P 500 declined approximately 34% from the high on February 19th to the recent low on March 23rd. That is 34% down in 34 calendar days. Previous downturns of this magnitude have taken 6-12 months to evolve.
2.Hard stop for every part of the economy
Our economy went from running on full cylinder 4 weeks ago to a screeching halt. Every part of the economy is affected by this involuntary halt of activity, this causes very few places to hide.
From a financial market point of view this is an unprecedented downturn for the following reasons:
1.The rate at which the market declined from the high has never been seen before
The S&P 500 declined approximately 34% from the high on February 19th to the recent low on March 23rd. That is 34% down in 34 calendar days. Previous downturns of this magnitude have taken 6-12 months to evolve.
2.Hard stop for every part of the economy
Our economy went from running on full cylinder 4 weeks ago to a screeching halt. Every part of the economy is affected by this involuntary halt of activity, this causes very few places to hide.
How we are handling this market downturn
The duration assumption
It is important to make a conservative estimate about the duration of this crisis. We believe that purely from a market downturn point of view the worst-case scenario is around 12 months while the best-case scenario is around 6 months.
Why is it important to make an assumption about duration?
Why is it important to make an assumption about duration?
- In order to have enough cash available from clients to meet their withdrawal requirement without any forced selling of depressed assets.
- To evaluate the impact of this downturn on the client’s long-term plan. A 12-month downturn will have much less impact on your long-term plan versus a 3-year downturn. This helps us plan and protect you accordingly.
Executing the strategy
If there is one thing, I have learned from previous major downturns it is that you have to follow the investment strategy you adopted before the crisis. It is a very common mistake to throw the strategy book out of the window when panic sets in.
A word about cash positions
Our strategy calls for a monthly raise of cash position as markets deteriorate. What this means is that in times of market downturn we will raise our cash position slowly month over month as market conditions deteriorate.
What this does not mean is that we would be aggressively going to cash as that would be counterproductive to our long-term investment objective.
The purpose of this cash position is to provide clients with enough cash to weather through the downturn without being forced to sell for cash needs and withdrawals. For clients that are not in the withdrawal phase yet, the cash positions might be smaller and might serve the purpose of re balancing.
A word about cash positions
Our strategy calls for a monthly raise of cash position as markets deteriorate. What this means is that in times of market downturn we will raise our cash position slowly month over month as market conditions deteriorate.
What this does not mean is that we would be aggressively going to cash as that would be counterproductive to our long-term investment objective.
The purpose of this cash position is to provide clients with enough cash to weather through the downturn without being forced to sell for cash needs and withdrawals. For clients that are not in the withdrawal phase yet, the cash positions might be smaller and might serve the purpose of re balancing.
Improving the portfolio
Every market downturn provides an opportunity for long term investors to improve their portfolio. We are doing the same. For this goal we are carefully looking at 3 factors:
- Observation of our current portfolio around how assets are behaving relative to the overall market. If assets are performing poorly relative to the overall market, they might earn themselves a place on the chopping block. Of course, I am oversimplifying the process there are many factors that go into this evaluation. That being said, I have a list of names that will not be with us for long.
- Scanning for opportunities in companies and ETFs that would be great additions to client portfolios and can be acquired for these depressed values. You might have already seen some buys and going forward you might see some more based of your risk profile and cash position.
- Preparing the portfolio for the future - Every crisis leads to changes in our lifestyle and this situation is certainly no different. Once we come out of this, which I am most certain we will, there are things that we will learn to do differently and many things that we would be less likely to do. With that assumption, I believe it is important to prepare our portfolios so we can come out financially stronger in this new environment. You will see some buys that are focused on this specific goal. You will also see some sells that are related to this goal.
Key takeaways …
All of you are smarter and, in most cases, more experienced than me thus I am a bit reluctant to give you advice regarding non-market related takeaways. From a portfolio/financial markets point of view, I have an advantage over you because I am less emotional about your nest egg than you are. Keeping that is mind here are a few takeaways that are important:
- You are invested for the long term and you do not need all your nest egg in the next 12 months. You only need a small fraction of that money if that.This is important to remember because when you look at the market and see this tsunami of selling, it is natural to feel the urge to sell. Let’s take a step back and think about who is selling... In my opinion, people or firms are that selling are those that are being forced to sell due to margin calls, excessive leverage or computer algorithms. These are short term moves and we are long term investors.
- It is important to remember that the next 3 -6 months are going to be extremely volatile and portfolio values are going to fluctuate. What should matter to you is where these values are going be in 1-2 years versus where they are going to be in 1-2 months. We know this is easier said than done as we look at these values all day long. A neat trick is to focus more on the % drop of the portfolio versus the dollar value drop. Or the other trick is to just pick up the phone and call us when you feel anxious.
- One piece of advice for those of you with 401ks or retirement accounts outside of Parks Capital. Please do not try to self- manage them in the middle of a crisis. If you feel like the loss was more than you can emotionally manage then after the crisis is over it might be a good idea to reallocate the portfolio according.
Thank you …
We cannot finish this piece without saying thank you for 2 reasons:
- For being the best clients ever - We hear all these horror stories about advisors being on the phone trying to talk their client off the financial suicide ledge. We cannot tell you how much we appreciate you. Almost all of you are calm, thinking about long term and focused on what is most important in this crisis. We are truly proud of you. So, thank you for that.
- Thank you for your trust - We don’t say it enough, but we truly appreciate the trust you have bestowed upon us. We know how important this is and we truly appreciate it.Please stay safe and try to enjoy the social distancing as much as you possibly can. Please don’t hesitate to pick up the phone and call us if you need anything at all or need to chat about markets and portfolios. We will get through this and when we come out, we will be stronger and better. This is our true belief.
Written by:
 Rajiv Dixit Financial Advisor & Portfolio Manager Parks Capital | Read more about Parks Capital & Rajiv Dixit by visiting Parks Capital at a glance |
