Portfolio Wisdom Blogs Archives

August 28, 2020August 29, 2020

Reducing Market Risk … Almost Completely

As of this writing, I’ve moved to 85% cash and 15% SLV (Silver ETF) in our conservative client portfolios. I’ve moved to 40% cash, 35% SLV and 15% GDX (Gold Miners Index) in our aggressive client portfolios.

I’ve been an individual investor since the early 1990s, a professional since 2001, and I’ve never seen the kind of disconnect between reality and the stock market I see today. The most similar situation I can remember is the dot.com craze in 1999-2000.

I remember I was invested in the hot technology stocks at the time. They were going straight up. The Nasdaq hit 5000, an all-time high. Sue (my wife) and I were on a two-week all-expense-paid trip to Hawaii we received from IBM as a Global Recognition Award for accomplishments in 1999 and 1998. During our time in Hawaii (May 2000), I checked our stock portfolio at Charles Schwab using a dialup-over-the-phone-line modem (no WIFI !) in our hotel. In one week, our portfolio value had dropped 15%!

When we got home, our portfolio had bounced back, but I had seen enough. I wanted no part of the risk of a bear market in stocks, even if I was missing out on more gains. I went to cash in our portfolio and 100% bonds in my IBM 401k. You know what happened next.

I did not know the future then and I don’t know the future now. We are playing the probabilities and the risk vs. reward of staying in or getting out of stocks. The bounce we have experienced from the March 2020 crash lows has been an incredible gift from the Federal Reserve and the $ Trillions it created. Stocks may continue to rise, but the potential reward is not worth taking the risk of another bear market in stocks.

This last week, Mr. Powell at the Federal Reserve announced a policy change. He said words to the effect that the Fed would allow inflation to exceed 2% instead of targeting 2%. He explained that the Fed would be watching for an “average” inflation rate of 2%. What does that mean?

Here are my thoughts:

1. The Fed will not raise rates to stop inflation because they are more afraid of deflation, a market crash, and an economic depression than they are of inflation.

2. If the Fed is more afraid of a deflationary depression, then that must be a real possibility, even though the cost of healthcare, prescriptions, food and shelter are increasing far more than 2%/year.

3. If a deflationary depression is a real possibility, then that is what we will protect against by raising cash. Historically, stocks fall during deflationary times. Bonds don’t look as good to me now as they did 20 years ago… not by a long shot.

4. If the Fed succeeds in creating/allowing inflation to increase, owning precious metals should help us. Historically, stocks perform well in a low inflation environment, but they perform poorly in a high inflation environment.

That concludes my analysis.

Enjoy your weekend with friends and family. Please be safe.

Dale

April 28, 2020April 28, 2020

Take a Look at Your Portfolio

We have seen a nice bounce back from the bottom in March 2020. As of this writing, in 2020:

SPY (S&P-500 ETF): -10.43%
GLD(Gold ETF): +12.35%
IYR (US Real Estate ETF): -17.65%
TLT (Long US Treasuries): +25.04%
VXF (US Russell 2000 stocks): -17.24%

Wow! You mean stocks are not back to our highs? No stocks are not even back to the start of the year 2020. As you see, bonds and gold are up quite a bit and helped our methodology results this year. As I wrote in recent blogs, I removed Russell 2000 stocks and real estate from our portfolios earlier this year because of the unprecedented Covid-19 situation. Actually, the VXF was removed before the crash. I sold half the real estate before the market crashed, and sold the other half during the decline.

What should you do now? Well, this blog is educational in nature and not intended to be investment advice, so I won’t say “do this” or “do that”. However, the way I’ve been managing our portfolios is to:
1. Raise cash early in the crisis to reduce risk / volatility in our accounts.
2. Gradually invest some of our cash on the way down.
3. Gradually rebuild the cash cushion by selling on the way up.
Go back to our normal methodology after the volatility in the markets returns to “normal” or something like it was in the year or so before the crash.

“Wait !,” you say. “It’s too late! My advisor (or myself) did not raise any cash ahead of time.” “Heck! He/she/me just tells me to hang on and rebalance every quarter and hope for the best!”. So how does that make you feel?

In my view, it is not too late to think about implementing your own version of the 1-2-3 plan above, depending on how close you are to retirement or needing the money.

Noone knows the future. But the markets, the Fed and Congress, and person who is signing those aid checks 🙂 … have given us a great gift in the stock market rally. Think of three different scenarios:
1. Stocks roll over and go back to the lows of last month. Would you be glad you raised cash? Would you kick yourself for NOT raising cash?
2. Stocks continue to rally back to the all-time highs in February. Would you kick yourself for raising cash? Would you be glad you held on to your stocks all the way back?
3. Stocks keep moving sideways. . . up a few percent, then down a few percent, like the last couple of weeks. Would you feel good or bad about your plan?

If you think in terms of scenarios: best case, worst case, middle case, making the decision may be easier. If you cannot live with the worst case scenario, then you might want to think about how to eliminate that scenario or at least mitigate it.

Take care and stay safe

Dale