The Need for a Defensive Investing Strategy in 2018 and 2019

The Need for a Defensive Investing Strategy in 2018 and 2019

In my article on June 22, I warned of potential stock market risk ahead and suggested that it was time to lower risk and become more defensive. The five experts I quoted were all warning of an outright stock market and bond market collapse. None have backed away from those predictions.

This last month or so has been filled with volatility. The volatility index has soared from 18.61 to a high of 25.98 – an increase of 39%.

It is not uncommon for investors to just put their money in the stock market and leave it alone. This is called “passive investing”. It allows a person to enjoy much of the gains of the market during rising market conditions. However, the downside is rarely warned against. The flip side of those gains is that as equities fall, losses can mount quickly.

A USA Today article written on July 21 of this year points out that risk is right in front of us and that we would be wise to heed the lessons from history.  Risks pointed out in this article began to emerge in October.  According to Motley Fool, Warren Buffett warned Berkshire Hathaway shareholders in the most recent annual letter that “losses of 50% or more are not only possible, but inevitable in the future.”

I believe there are numerous ways to lower stock market investing risk and also take advantage of stock market gains. I prefer an active management style, but there are also passive approaches. Whatever method you use, be careful where you get your advice and be confident in your approach.

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. He may be contacted at ben@reppondinvestments.com or (406) 871-3321.

Reppond Investments, Inc. is a registered investment adviser. 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.
Please click on the embedded links for specific details related to sources and comments cited in this article.

Retiring in the Gig Economy

Retiring in the Gig Economy

A gig economy is an environment in which temporary positions are common, and organizations contract with independent workers for short-term engagements. The workplace and many jobs are moving into the gig economy.  In this digital age, the workforce is increasingly mobile and work can be done from anywhere, giving workers the flexibility and lifestyle they desire.

Working in the Gig Economy

In a recent Harvard Business Review article entitled, Thriving in the Gig Economy, the authors point out that gig workers “cultivate four types of connections — to place, routines, purpose, and people — that help them endure the emotional ups and downs of their work and gain energy and inspiration from their freedom.”

Younger workers are demanding more work flexibility to fit their lifestyle choices and older workers are working longer or seek to supplement their retirement incomes.  Employers who adapt to the changing dynamics among workers will be more able to fill jobs with needed workers.

Retiring in the Gig Economy

According to NPR, “within a decade, contractors and freelancers could make up half of the American workforce. Workers across all industries and at all professional levels will be touched by the movement toward independent work — one without the constraints, or benefits, of full-time employment.”

Many gig economy jobs are available to retirees who want to work longer or supplement their retirement income.  According to Kiplinger, “older adults are driving for Uber, renting out their spare rooms or vacation homes to travelers through Airbnb, or pet-sitting. More than 400,000 seniors are now doing gig work through such online platforms.”

Statistics That Explain the Gig Economy

Resources for the Gig Economy

Retirement is different for many people today than in previous generations.  Many are finding gigs that fit their lifestyle and use their experience and talents.

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser. 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.

Ben Reppond may be contacted by email at ben@reppondinvestments.com or (406) 871-3321.

A Stock Market Crash in 2020?

 

Yes, according to the “experts”. 

These “experts” understand economic and stock market cycles.  The overriding tone of each is that the current 10 year period of economic gains is coming to an end.  No one, including these men, knows the exact month the market will begin its decline.  However, in viewing all of these comments, the consensus is that a serious decline is likely to begin within the next two years.

Some investors and even investment advisors are resigned to just ride the market down and accept whatever pain that delivers.  However, if we believe a collapse in stock prices is coming, why not seek to lower that risk – and the pain associated with it?  Have the past crashes not taught us anything?  Is the pain now a distant memory for many investors?  The traditional answer is to mix one’s stock investments with bonds or bond funds.  All five of the above experts are rejecting that type of advice.  Each is saying that bonds will inevitably decline if interest rates go up – and none of them are disputing the potential rise of interest rates.

There have been 21 stock market crashes since 1800 according to Wikipedia.  That is roughly one crash every 10 years.  Some crashes are closer together and some are further apart – but on average, about every 10 years the stock market just collapses.  Here we are again.  It has been about 10 years since the last crash.  The above experts are saying that there is a great level of risk on the economic horizon and that a major decline is unavoidable.

If the above experts and their predictions are true, what can the average investor do about it?

  1. Be careful of taking advice from those who think they know more than these experts, and be wary of those who have an agenda to let your money be fully exposed all the way down to the bottom.
  2. Consider using a strategy of lowering risk and market exposure over the next two years, depending on your risk profile and potential tax consequences in taxable accounts.
  3. Stay calm and do not panic – and do not try to go it alone. According to Jim Rogers, this could bethe worst financial crash you have ever seen.

In my opinion, what matters most is from where you get your advice.  Be careful.

 

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser. 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.

Please click on the embedded links for specific details related to sources and comments cited in this article.

 

 

Investing Lessons from Warren Buffett

Those saving for retirement should ask two questions:

Is my rate of return meeting my expectations?

If/when the market collapses, what protections do I truly have in place to protect my assets?

Traditional models don’t seem to be working like they used to

Traditional investment models typically employ some version of Modern Portfolio Theory (MPT).  Many still hold to the belief that traditional asset allocation (as defined by MPT) is the ideal way to invest.  I question this type of model in a period of rising interest rates.  As interest rates rise it is hard to fathom how bonds or bond funds give one the protection they did for 35 years during a climate of falling interest rates.

Warren Buffett wrote in his annual report to shareholders, “It is a terrible mistake for investors with long-term horizons — among them, pension funds, college endowments and savings-minded individuals — to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks.  Often, high-grade bonds in an investment portfolio increase its risk.”

Famed investor and money manager, Jim Rogers, said, “You will see higher interest rates over the next few years. In fact, interest rates will go much, much higher.  We have certainly seen a top for the bond market. There is no question about that. Bonds will be going lower for many years to come.”

Bonds have been a key part of traditional investment models for the past 35 years as they have been a primary hedge against stock market risk.  Conventional thinking has been tied to some blend of stocks and bonds (equities and fixed income). Those days are behind us if you believe Warren Buffett and Jim Rogers – and I do.

If bonds are not a good hedge against stock market risk, what is?

Again, I go back to Warren Buffett.  Mr. Buffett has done two things in anticipation of a major stock market crash.  One, he has warned his investors that a 50% stock market crash is “inevitable”.  Two, he has accumulated $118 billion in cash in order to weather such a crash and also to take advantage of a crash and be able to buy companies at much lower prices.

If we were to take that down to the level of the average person, I believe it would tell us to put a substantial portion of our money in cash and be ready for this “inevitable” crash.  It would further tell us to be ready to deploy that cash when others are selling stocks – when the intense pain that huge losses can cause is inflicted on investors.  In other words, the Buffett model is to accumulate cash when others are buying and to buy when others are selling.

An alternative approach

I use a version of Warren Buffett’s approach.  My mathematical model “tells” me to sell positions and accumulate cash as prices rise and to be patient so I can deploy that cash when prices drop.  I do not use bonds or bond funds because of the reasons stated above.  My approach is different from Buffett’s, however, in that I use index and sector funds rather than individual stocks.

No single approach is perfect and can avoid all losses in a severe market crash.  I believe that my approach can minimize losses and shorten the duration of those losses.  Investors need to be prepared for the fact that deep losses will occur in the market, have some way to minimize those losses, and have some method to take advantage of real buying opportunities when prices are lower.

Warren Buffett quote

Warren Buffett once said, “ Be fearful when others are greedy and greedy when others are fearful.”

 

Disclosures

Past performance is no guarantee of future results. While active management seeks to produce higher returns than those of passively managed portfolios, historical pricing patterns, which are a component of our mathematical model, may not necessarily be repeated in the future. This type of strategy is not suitable for all investors and there is no guarantee that your investment objective will be met or that you will not incur losses, including loss of principal.

Please click on the embedded links for specific details related to sources and comments cited in this article.

Reppond Investments, Inc. is an independent investment advisor registered in the States of Montana and Washington. We may not transact business in states where we are not appropriately registered, excluded or exempted from registration.

How Do You Respond to Stock Market Risk?

Stock market risk has increased significantly this year.  The Dow Jones Industrial Average fell 3083 points (over 11%) from January 26 to March 23.  Stocks have continued on a rough ride since.

When sharp stock market declines have happened in the past, have you heard financial advisors have say things like, “You can’t time the market”, “You have to invest for the long run”, “You can’t sell now” or “We didn’t see this coming”?

I believe the time for dollar-cost-averaging (investing on a regular schedule regardless of share price) is mostly in the past for those who are older.  Those approaching or entering retirement do not have the years needed to recover from deep investment losses.  Answers like those above can be disconcerting to investors who are paying professionals a lot to help minimize stock market risk in their portfolios – especially for those who have described themselves as low risk investors.  I have seen such investors become frustrated and angry when their account balances evaporate.

Diversification is another strategy used by financial advisors to potentially lower risk. Diversification sounds like a great strategy on the surface – and in certain ways, it can be.  However, when stocks, stock sectors and stock indexes all decline together, how much risk protection does diversification provide?  Warren Buffett said,  “Diversification is protection against ignorance.  It makes little sense if you know what you are doing.”  Simply viewing one’s account statement may provide insight into whether diversification has helped mitigate your risk.

Typically, financial advisors add bonds or bond funds to a stock (or equity based) portfolio to lower overall portfolio risk.  Generally, using this strategy to protect against future stock market risk is based upon the changes in interest rates.  Bond prices generally move inversely to those of interest rates.  As rates increase, bonds and bond fund prices decline.  The Federal Reserve has said that we should see more interest rate hikes both this year and next.  If stock prices decline, how can bonds and bond fund prices increase during a period of rising interest rates?  The strategies advisors have used during the past 35 years of interest rate declines may not work during a period in which interest rates rise.

Further, most of the experts that I follow have no bonds or very few.  For example, Scott Malpass, Chief Investment Officer of Notre Dame Endowment Fund, has said, “There’s a misconception about risk. Some people might characterize a portfolio that’s plain vanilla — 75 percent equities and 25 percent bonds — as low risk. It’s actually high risk.”  Warren Buffett added similar comments: “It is a terrible mistake for investors with long-term horizons — among them, pension funds, college endowments and savings-minded individuals — to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks.  Often, high-grade bonds in an investment portfolio increase its risk.”

What is the answer to the question of how to lower stock market risk?

How does one minimize stock market risk? Based on my work and research around this, I developed a mathematical model which is designed to minimize stock market risk.  While there are no guarantees, this approach is designed to lock in gains before market corrections occur – in most circumstances.  I believe that historical patterns of the ups and downs of previous stock market periods can influence our thinking as we look to the future.  I see that historical periods in which the market rises to high levels are followed by periods when it experiences deep declines.

Investors often wring their hands after deep declines and try to understand why they are experiencing another “ride down” … and how could it have been prevented. They wonder why they weren’t told about the coming risk.

I believe active management, which allows your advisor to move your investments from one asset class (i.e. equities) to another (i.e. money market) BEFORE downside risk occurs, can assist in minimizing risk.  While no strategy is perfect, it seems that the use of a well-designed mathematical model, which eliminates judgement and emotion as much as possible, can potentially achieve the goal of minimizing risk with higher returns.

Disclosures

Past performance is no guarantee of future results. While active management seeks to produce higher returns than those of passively managed portfolios, historical pricing patterns, which are a component of our mathematical model, may not necessarily be repeated in the future. This type of strategy is not suitable for all investors and there is no guarantee that your investment objective will be met or that you will not incur losses, including loss of principal.

Please click on the embedded links for specific details related to sources and comments cited in this article.

Reppond Investments, Inc. is an independent investment advisor registered in the States of Montana and Washington. We may not transact business in states where we are not appropriately registered, excluded or exempted from registration.