What would Hyman Minsky say about this stock market?

What would Hyman Minsky say about this stock market?

Hyman Minsky, a well-known 20th century US economist, was professor of macroeconomics at Washington University in St. Louis and a distinguished scholar at Levy Economics Institute at Bard College.  He is best known for developing his financial instability hypothesis.  Minsky stated that the greater the stability of the stock market, the greater the instability that follows.  My version of this is that the more the stock market moves up without a correction, the further it will fall.

Minsky’s Hypothesis

Minsky unveiled this theory in 1992.  He died in 1996 and did not live to see the tech bubble of 2000-2002 or the US housing bubble of 2007-2009, both demonstrations of his hypothesis.  During the years preceding these market collapses there were “bubbles” building inside the stock market.  They were detected by a few experts, but were largely ignored or explained away by “Wall Street” and many investors.  It was commonly believed that an investor needed to “get onboard” or be left behind as was aptly portrayed in the movie, The Big Short.

Hyman Minsky

I suspect that if Minsky were alive today, he would continue to stand on his hypothesis, “The greater the stability of the stock market, the greater the instability that follows.”  In my opinion, this stock market is the perfect example which has led to previous collapses.  Sir John Templeton said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”  It seems that we are either in the euphoria stage – or close to it.  I frequently hear people talking with glee about how high the stock market is right now and how much money they are making in their 401(k)s or brokerage accounts.  I do not hear people having a realistic understanding of the cyclical nature of the stock market booms and busts.  However, I believe that Minsky would be extreme caution.

Where do we go from here?

I would not advocate that an investor sell all of their equity holdings and get out of the stock market. There may be more gains left in this euphoric bull market.  Truthfully, no one knows when the bull market will end nor do they know how.  However, it certainly seems like it is on the euphoric end of the cycle and, as Mr. Templeton said, historically euphoria has led to the end of bull markets.

In conclusion, now, more than ever, is a good time to start thinking about what a good defensive investment strategy would look like.  Whether you are a buy-and-hold investor or use active investment management now is an excellent time to match your allocation or strategy with your risk tolerance.  It is also a time in which wise investors know exactly what they own and why they own it.

Strategy and knowledge could greatly enhance successful portfolio management during the next bear market.

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

 

Investment Advisory Services offered through Reppond Investments, Inc.

If Hindsight is 20/20, what is Foresight?

In my article of December 20, 2017, I was urging investors to take a more cautious approach to investing in 2018.  For those in retirement or nearing retirement, traditional asset allocation did little to protect portfolios from decline in the last two weeks.  Many revere Warren Buffett.  Think about how much risk he was taking, because his Berkshire Hathaway shares declined over $11.2 billion in a single week.

In my view, tactical investing is the only way I know to potentially lower this risk. Tactical investing is a mathematical way of measuring stock market risk and seeking to minimize stock exposure when risk of owning stocks is too high.

There is no perfect answer for minimizing stock market risk in all market conditions.  However, on February 8th, sidestepping risk in conservative portfolios seemed like an alternative answer to traditional asset allocation investing.

Investors need to ask themselves one simple question:  Given my results on February 8th, how much risk have I been taking – and is that acceptable to my investing temperament?

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

Investment Advisory Services offered through Reppond Investments, Inc.

The Value of Tactical Investing in a Falling Stock Market

When the stock market begins to fall, investors ask, “How do I protect my investment?” it is not as simple as just selling everything and sitting in money market.  First, this could trigger long-term or short term capital gains.  Second, this market correction could be brief and one would miss the opportunity for future potential gains.  In other words, if you are going to try to time the market, you have to be right twice – when you get out and also when you get back in.

People I have talked to about their experience in 2008 have told me that they got out of the market at the wrong time and missed all or most of the gains that followed.  It almost takes being clairvoyant – knowing in advance when to get out and when to get back in.  I don’t think anyone knows how to do that.  And, if you are right this time, you may not be next time. The stock market is a complex place to know how to make money and lower risk at the same time.

The traditional answer is to blend bonds or bond funds with stocks or stock funds.  This has worked well for the last 35 years – during a period of falling interest rates. I do not see how the blending of stocks and bonds to lower risk is dealt with in a period of rising interest rates.

The issue is that if interest rates continue to rise, bonds and bond fund prices will fall.  What if the stock market falls at the same time?  I can find no textbook answers to that question.  I have asked financial advisors how they handle this dilemma.  I’ve never gotten a good answer.  All they know is to tell investors to ride it out.  How encouraging is that?

My answer to this dilemma is something I call tactical investing.  While there can be no guarantees, tactical investing is an emotionless mathematical way that reacts to specific signals that point to higher market risk. It also reacts to signals that point to potential upturns in the market – all with the goal of minimizing the downside and participating in the upside.

I spent 10,000 hours in research from 2009 to 2014 studying the patterns of 2008 as well as previous crashes.  From that research, I built a mathematical model based on historical patterns – designed to potentially minimize downside risk and participate in the upside of the market.

I completely acknowledge that this mathematical model is not perfect.  It does not completely eliminate all risk, nor does it capture all of the upside in an upwardly trending market. However, this is the only way I have found that does both to my satisfaction.

Tactical investing is ideal in an IRA, but in certain conditions can also be achieved by tax-deferring gains with taxable money.

Think about tactical investing as a way to potentially moderate downside market risk without compromising upside participation.

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

Investment Advisory Services offered through Reppond Investments, Inc.