Looking for One Foot Bars

After a difficult start to 2022, the tone of markets has become decidedly worse over the last 2 weeks, notwithstanding the rally on Friday, as markets appear to be shifting their focus from an inflation problem to a growth problem (i.e. a looming recession). The S&P 500 is now down almost 20% from its high late last year and the NASDAQ index is down more than 30% from its high. It is precisely this type of volatility that we attempt to circumvent with your wealth and we do that by balancing risks in your portfolios, depending on your needs. That means we own stocks, we own bonds, we own commodities, and we own gold, but it doesn’t mean that we sit on our hands. For example, when rates went extremely low as the pandemic started in 2020, that increased the risk in the bond portfolio and we reduced our bond exposure to mitigate that. We didn’t sell ALL the bonds, that would unbalance the portfolio and expose you to more risk.

The first quarter of 2022 saw the worst bond performance in more than 40 years. Yes, we lost some money in bonds, but not as much as we made on the way up, or hope to make when they rebound. Now we are approaching the time to increase our bond exposure again. Why? Precisely because bonds have been crushed so thoroughly in 2022. The risk in bonds has been reduced as rates have risen and they are largely discounting the worst economic scenario – inflation. If we have a recession, bonds should perform well, as they did this week as growth concerns became main stream.

More recently, we also reduced equity exposure as we saw the growing risk of a recession. Combined with high valuations, the risk in stocks had risen, and we adjusted to stay balanced. We didn’t sell everything, but we raised some cash and/or invested in hedged equities to minimize the drawdown, allowing us to still benefit in the event we were wrong. Our commitment to commodities has paid large dividends for us as well. Should inflation stick around, gold is a solid investment.

The game plan in periods like this is to recognize and manage risk, keep the drawdown to a minimum, and then re-invest in assets when valuations become attractive. In other words, we prefer to buy when things are ‘on sale’. While the news over the last several weeks may appear miserable and even a little scary, for us, this is the sound of opportunity knocking. It’s a great time to start picking-up quality companies at attractive prices because this too shall pass. Don’t let the stock market headlines get you down. What they really say is “On Sale, 20% to 30% off”!

Warren Buffett is quoted as saying “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” That is precisely what we are trying to do.

Timing Markets Simply Doesn’t Work

It is an extremely rare breed that can consistently and accurately pick tops and bottoms in markets, yet most investors attempt it anyway. DALBAR, a financial services research firm, has studied this problem by examining the timing of mutual fund flows. Based on that analysis, DALBAR estimates that the “average investor” over a 20-year period from 2001 through 2020 earned only 2.9% annualized. That is well below the 6.4% of the classic 60% stock/40% bond portfolio. Market timing works well in theory, but is extremely difficult in practice.