Structure Matters: Company, Stock Selection, Portfolio Strategy, Lifestyle, Process Solution

By Dan Weiskopf, ETF Professor

Stressed about your finances and your portfolio strategy?

There are many negative sentiments that undermine confidence in the markets these days. Short-term headlines highlight rising risk and lack confidence in the future.

  • Are we in a “bear market?” When did we enter it?
  • Interest rates will rise and crush bonds.
  • Inflation at 7.5% will permanently erode our standard of living.
  • War between Russia/Ukraine and China/Taiwan.

All of this noise is evidence-based and, for some investors, concerning. Plus, it’s not aligned with the experience of most investors, as the overhang sets the tone for a head-on collision.

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Perhaps the solution to finding “zen” in your outlook is to go through a planning session with your financial advisor or to compartmentalize your financial situation. Do you have investments in buckets? Alternatively, you can simply fundraise incrementally, followed by a plan to come back as you find a more measured beta. The action sometimes looks like a check.

Solve the structural problem

Ironically, planning for a “black swan” is a contradiction in terms, and more importantly (in my opinion only), an effort to look smart. Deal with what you can control. If you’re nervous about the markets, address the first structural issue.

  • First problem: will a drop of 10-20%, 30-40% in the markets be an opportunity, a change of life for you, or simply a bad moment? Obviously, part of the answer here is measured by how close you are to retirement. Putting the first problem in context can help with the second layer problem.
  • Does the income from your investment portfolio determine your income? If portfolio income is actually the main driver of your lifestyle, look at your expenses! Find the balance between income and expenses early on. Everyone wants more revenue, but in a world of rising costs, figure out your variable costs and your fixed costs. What do we need and what do we want? We talk all day with financial advisors who discuss planning issues, investment portfolio strategy and client goals. A little customer love isn’t a bad thing right now. Tell your clients that there are no easy answers and it is clear that it is not possible to take on more market risk when circumstances change. As the saying goes, markets don’t do well at scaling a wall of worry, so wait for clarity.
  • Cash or money on rainy days.

Answer: It may come as a surprise to some, but it seems that burning money by holding cash is a recent trend. According to the Office of Financial Research, money market funds are at relatively high levels, similar to Covid peaks.

Cash is an asset class that may warrant negative return right now, but its math is clear (negative 5-7% versus inflation). If you were conservative in 2021, your return flow may already reflect a high cash balance. If you were aggressive before, with lots of market beta, silver will help you even more. Cash, as an asset class, is a balancing solution that provides peace of mind in the face of volatility. To be clear, while offering guaranteed capital loss over the long term, even such a loss is quantifiable. Note that as co-PM of BLOK, my eyes are open to this statement, angering questions that Bitcoin is a store of value over cash. My answer: I am neither a trader nor a maximalist. Market volatility can lead to bad decisions, so any extreme positions should be minimized.

Conclusion: nervous? Take progressive action

Beta-measured volatility in bull markets is exciting and rewarding. However, in a volatile or weak market, people may want to access their financial situation. Our “structure matters” message may be boring, but people’s quality of life can be affected by their financial pressures. It can be difficult to have a clear head at certain times. Compartmentalizing your short-term cash consumption and your long-term portfolio compartments can help stabilize stress. Such a plan also helps investors know that they have the problem under control. Remember the good news: in most cases, these recent bull markets have likely led investors to hit their targets sooner than traditional assumptions. Final comment: Don’t make extreme decisions based on nervousness. Sentiments are not an investment strategy or the basis of an investment plan.

Footnotes and interesting information

All of this negativity may be due to a 30-40% drop in media viewership. https://deadline.com/2021/12/cable-news-ratings-2021-fox-cnn-1234899789/

Goldman Sachs pointed to cash piling up in the fourth quarter. https://www.cnbc.com/2021/12/16/big-wealth-investors-are-likely-to-put-money-to-work-in-stocks-after-amassing-record-levels-of- cash.html

What is a black swan https://tradebrains.in/black-swans-investing/

Originally published by Toroso Investments on February 23, 2022.

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The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor should review an investment strategy for their own particular situation before making an investment decision.

All expressions of opinion are subject to change without notice in response to changing market conditions. Data contained herein from third-party vendors is obtained from sources believed to be reliable. However, its accuracy, completeness or reliability cannot be guaranteed.

The examples provided are for illustrative purposes only and are not intended to reflect the results you may expect to obtain.

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Topics: Weekly Research, Structural Questions

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Don F. Davis