Oil lower by over 50%. Greece possibly leaving the Eurozone. Hints of global deflation, especially in Europe. Russia continuing to cause problems in Eastern Ukraine. China feeling a slowdown coupled with concerns about its enormous shadow banking sector. ISIL causing trouble in the Middle East. Terrorist attacks in Paris. Those are just a few of the reasons for folks to be worried these days. It is no secret that I have concerns about the heights to which the markets have climbed without a significant pullback over the last several years. Volatility since last October makes these concerns a daily preoccupation and the obvious question is what will I do when markets have a sustained sell off…will Frontier clients ride the markets down or will we jump to the sidelines?
Most answer this question in vague terms – saying something about evaluating risks, considering all variables, and standing ready to take action when things begin to go south. While all that is good and well it avoids answering the question while implying that one will be able to correctly sell assets in front of a market drop. I’d rather be very clear and very direct, despite the discomfort it may cause. In short, I am not reducing exposure to stocks in the current environment and have no intention of going to cash if/when the markets take another nose-dive. Predicting when markets are going to sell off is impossible, and predicting when they will recover is, too. Attempting to do so and acting on such guesses with client assets is not investment management, it’s speculation management, and that’s irresponsible.
So yes, in a horrible market we will feel the pain while avoiding the temptation to sell. But when markets recover, like they always have, we will fully enjoy that recovery rather than watching from the sidelines. The mistake most investors make, and the mistake I refuse to make on behalf of Frontier clients, is to sell during a fire sale and then try to figure out when to get back in. It is the clearest recipe for portfolio disaster there is, so it’s best to know now that I intend to avoid that mistake with any assets for which I have a discretionary mandate.
And by the way, a sharp drop in the markets is by no means preordained. There are many folks out there who are amazingly optimistic about the future. The US continues to recover from the financial crisis and is in decent shape by many measures. Europe could actually change for the better if it figures out how to agree on a fiscal and monetary structure that actually makes sense, and Abenomics offers more hope for Japan than it’s had in years. Yes, oil’s collapse will hurt the oil exporting emerging markets, but there are plenty of oil importing emerging markets that should hugely benefit from today’s low prices (India, for example). So remain optimistic, but understand that when things hit the proverbial fan, we won’t react with fearful trading.
One final note. This is not to say that I won’t rebalance client portfolios along the way. Rebalancing is a key component of portfolio management. I establish size limits around each holding, and when those limits are breached I do what is necessary to reestablish the portfolio weights. In a down market it means I will sell some of any asset that has done relatively well and is above its target threshold to raise cash and buy more of any asset that is below its target threshold. Maintaining one’s risk/reward objective is imperative during all market environments.