Fortifying...
A decade has passed
since the Great Recession of 2008-2009.
In that span the financial markets have recovered, and people have been
feeling pretty good about the results they have achieved in their
investments. And yet, a subliminal
fearfulness underlies almost all of the success the recovery has yielded. The "next downturn" is something I
have to address in my conversations with clients and the media more frequently
than our current annual returns. Indeed,
last week's extreme stock market volatility did little to postpone the
discussion.
When, or if, the next
market capitulation does occur, it is far less likely to impact the economy as
severely as the last one, but no one seems to believe that.
Individuals and
corporations continue to have 2008 on their minds. And yet, to their credit, portfolios and
balance sheets are not nearly as reckless as they had been in the run-up to the
last recession. So who's right?
Economic data such as
unemployment, wages, and productivity have caught up with or exceeded their
levels of a decade ago, offset today somewhat by current end-of-cycle slowdowns
in earnings acceleration patterns, regional trade disputes, and international conflicts. Even so, the fear of a snowball running
downhill should be somewhat muted. Yes,
recessions and market pullbacks are costly and painful. No one denies the herculean task it has been
to dig out from the wreckage wrought upon the global economic landscape. But recovery times should be much quicker
this next time around because of precautions having been taken to avert such a
catastrophe.
There are no easy fixes
that limit the effects of excess and greed.
The best way I know of to avoid portfolio demolition is by sector, asset
class, and geographic diversification.
Irrespective of one's tolerance for danger, the best guardian against
multiple risk factors is asset
allocation.
Consider, our portfolios
were at or near record levels of cash right before the 2008 collapse, in
response to the earlier half-decade in which our accounts were generating
competitive capital gains. It was a time
to pare down the risk-taking, bank our profits, and recalibrate the financial backdrop. We did not avoid the market pullback
altogether, but our clients were spared calamity not only on a relative basis
but on an absolute one as well.
Foresight and planning ahead using quantitative metrics allowed us to
scan the probability of capital gains from an already engorged stock market and
make the decision to back off from full investment. Did we have too much cash as a result? Perhaps. But consider any other client who
was 100% invested in equities and bonds and the cliff from which they fell.
...one
brick at a time
Let's face it,
investing does not have to mean embracing
risk...it means managing risk. The elusive goal of un-correlating one's
wealth- building from the day-to-day exigencies of economic, political, and
anecdotal statistics is difficult, but not impossible.
As my investment
processes demonstrate, structuring initially from a solid foundation (fixed
income/cash reserves) is the most important component to creating risk-averse
portfolios. Imagine the base of a
triangle and build upwards from there.
But secure reserves are not simply enough. There are few "growth"
opportunities in cash. One must also
construct supplemental franchises upon the base, which means biting the bullet and
accepting growth as a component to the ultimate structure. One cannot "time" the markets; one
must acknowledge that cycles are a part of the portfolio paradigm. I will also remind my readers that secular
(generational) themes such as energy, food, infrastructure, healthcare have
staying power and capital gains potential despite their unique short-term
cyclical topographies.
A good money manager
also recognizes that clients sometimes cannot fully articulate their inner
thoughts, speaking in "code" about how they feel about their goals or
their tolerances for volatility. It is
the manager's job to construct appropriate lanes to help the client fully
actualize his objectives and to sleep well at night.
There is no such thing
as a perfect strategy, investment, or portfolio. There only is the perfect preparation for any
contingency that might arise.
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