This week the noise was over whelming. For that reason I wanted to respond to the markets a little different than doing my best to try to tell you what happened and what it means.
Yes, global markets turned south on China Fears and Uncertainty over Oil. Minutes from the July Fed revealed lots of indecision. St. Louis Federal Reserve Bank paper questions the effectiveness of Quantitative Easing. We have printed $4 Trillion and all we got was a lousy economy? These are just a few things that came up this week.
The real question is how do we react? I am often reminded of a saying I once heard regarding Choice. Choice – “Not the circumstance of what happens to us but the reaction we have to it.”
For our clients and those with a plan, the reaction is predetermined and based on rules, constant monitoring and evaluation. Below is a response to the current week. A bit different than what you are used to getting but I hope timely and focused on the importance of discipline and having a plan for all markets.
Why Do We Have Rules?
Why do we have rules? We’ve been in this whipsaw environment since January of 2014 (a long time). Over the last few years we have helped guide your financial plan and portfolio to reflect the uncertainty in our economy and protect capital as much as possible while capturing as much upside as possible. Over the last two weeks we have seen a continuation of what we have been experiencing for the last two years. Today and yesterday we have seen larger drops and more uncertainty hit the markets than we have seen in some time. As we have stated in the past markets are used to seeing at least a ten percent drop every twelve to eighteen months. The last time we have seen this was in 2009. For almost six years we have lived and prospered by an economy manufactured by cheap money and central banks and government action leading to the possibility of more bubbles in multiple markets.
First, as a client you have a plan. Our planning process and continued analysis and monitoring of your plan and investments have helped us better prepare for this type of market and the economy that may come from it. Your plan acts like the guard rails on the freeway keeping you on track and from getting off course or making decisions based on emotions. At every meeting we discuss these very issues. It is why we focus on your objectives and make sure your portfolio reflects those very goals, objectives and concerns. This should give you confidence and the knowledge that your plan is regularly monitored, tested and analyzed.
Rules: They keep us from “tinkering”, we are introducing the very thing (emotion) we are trying to remove by utilizing portfolios designed to reduce exposure in falling markets to protect against extreme losses and capture and compound capital in good markets. You have heard me say for the last couple of years, “we need to have one foot on the gas and one foot on the brake.”
We don’t have a crystal ball, so we don’t know which direction the market will break out to, but the one constant within capital markets is change, and for firms that “tinker” with their processes (fundamental, or quantitative), they increase the probability of missing the trend once it comes… and it will come regardless of the direction. We see both bullish and bearish arguments that are compelling. For our clients and most of our equity positions, we are prepared to protect and capture depending on the direction that emerges. A few days do not make a trend, but could be habit forming.
Why tactical, rule based portfolio management?
If the breakout is to the up or down, we want processes and rule based portfolios to remove the emotions and manage directional change. If the markets break up, we want our portfolios to materially participate and continue to compound investor capital. If the market breaks down and enters a bear market, we want managers to reduce risk and “get off the tracks” (go to cash). Past performance is no guarantee, but in 2008 the tactical manages we are utilizing did this and have proven their ability to manage through the changing market conditions. This won’t last forever, and the key is discipline, because duration is the great unknown. No one knows how long this will last… But if it ends with a breakdown and bear market, I would not want to be passive. If it ends and breaks out to new highs, tactical will materially participate.
Our team is always here for you. We are committed to your success and passionate about making sure we provide you the very best advice according to your unique situation.