Last year, Warren Buffett told Berkshire Hathaway shareholders that “losses of 50% or more are not only possible, but inevitable in the future.” Based on the context of the letter, his warnings seem to imply that he was looking at 2019 to 2020 as a period of high risk. He was not specific, but there was a reason he wrote this when he did.
Further, Scott Minerd, Guggenheim’s Global Chief Investment Officer, also warned that the market is on a “collision course with disaster,” and expects the worst of the damage to start in late 2019 and into 2020. His prediction is that we are in store for a wave of corporate debt defaults and a precipitous fall in equity prices – perhaps as much as 40% or more.
The US Treasuries just developed an “inverted yield curve”. That is when yields on short-term Treasury bills, notes, and bonds are higher than long-term yields. Every time this has happened during the past 50 years, a recession has always followed, according to The Balance. This is not an encouraging sign for investors without a strategy to deal with it.
Further, Central Banks in Europe are now worried that Germany is now headed into a recession. Since Germany is the leading economic force in Europe, and because of how intertwined Germany and Europe are with the United States, this is another indicator that there is likely trouble ahead for US investors.
I don’t want to lose half my money. Nobody does. This is not only a personal statement, but also the echo from my clients about their money.
If any of this is true, how do I protect my money? Of course, I could just sell equities (and bonds) and put my money in money market funds for a while. The problem with this is that it is a knee-jerk reaction and then, when would I know to get back into the market to take advantage of potential gains, which usually follow crashes. This involves a level of clairvoyance which I do not have. I call it dart-throwing. If I am fortunate enough to be right on the exit, am I also fortunate enough to be right on when to re-enter the market? Likely not.
So, what is the answer? I believe that the answer is active investment management. Active investment management is not perfect on when to reduce or eliminate market exposure and it is not perfect on when to get back into the market. But each active manager seeks to do this to the best of their ability.
I suggest that the key is to be part of an active management methodology that you believe will minimize downside market risk and participate as much as possible in market advances when the market again resumes an upward climb. To measure the effectiveness of any investment strategy, one needs to look at the complete market cycle and ask these questions:
How much risk am I taking to get the returns I expect to receive?
How much loss (drawdown) will I likely experience?
How long will it likely be until my money returns to where it started?
Am I satisfied with my answers to the above questions?
These questions are designed to give the investor a starting place to ask about risk vs. return.
Perhaps a look at an active investment manager’s historical patterns during previous periods of market risk will be instructive about how risk was handled in the past.
Another way to minimize downside stock market risk is to diversify one’s assets among multiple managers who provide many active management strategies. Rather than rely on a single manager’s style, why not utilize a multiple manager approach? Global View Capital Management has a multi-manager platform that allows their advisors to design a custom allocation of multiple active managers whose combined strategies are used to manage client assets.
To the best of my knowledge, the Global View platform is the most comprehensive and technologically advanced platform of active investment management strategies in the investment industry. A multi-manager platform allows the advisor to help his or her client to diversify strategies – all of which can be designed to minimize downside market risk.
Back to dart-throwing
I am aware that many investment professionals worry that there is real economic and investment risk ahead – and perhaps closer than we know. Friends of mine who manage money for clients using a more conventional approach often ask me, “What do you think of the market?” This question gets asked in a nervous and anxious kind of way. What I think they are really saying is that “I don’t know what is happening to the market, but I am out there gathering opinions so I can get a sense about what others are doing.”
I would be concerned if I had an investment advisor who was out there nervously asking for opinions about the direction of the market. If an advisor does not have a solid strategy on how to deal with serious market risk, the winds of the market will wreak havoc on them and their clients when the next serious stock market decline occurs. I call subjective decision making or dart-throwing.
I know that active management is not the perfect solution in all situations to market risk. However, it is the best way I know to minimize stock market risk.